
Boole*?. ? 7 



GopyrigiitN 



CflEXRIGHT DEPOSIT. 



THE 

STRANGLE HOLD 



By 
H. C. CUTTING 




1921 

M. A. DONOHUE & CO, 

CHICAGO 






Copyright 

H. C. CUTTING 

1921 



Published April, 1921 



Copyrighted in Great Britain 



APR 25 1921 



■§)CI.A611906 



TABLE OF CONTENTS 

CHAPTER PAGE 

I The Bar to Prosperity 1 

II Evolution of Our Exchange System . . 16 

III The Medium of Exchange a Public Utility 31 

IV The Industrial Strait-jacket .... 46 

V "Frozen Credits" 63 

VI A Perfect Exchange System .... 84 

VII 100% Safety and Elasticity .... 101 

VIII Breaking the Strangle Hold .... 128 

IX Modern Feudalism 151 

X Interest 163 

XI The Gold Standard 175 

XII Speculation 188 

XIII Rural Credits 198 

XIV The Federal Reserve 214 

XV The Conservative Banker 

and His Reserve Joke 232 

XVI Foreign Exchange 247 

XVII National Efficiency 266 

XVIII Conclusion 275 

Appendix 297 

Index 319 



CHAPTER I 

THE BAR TO PROSPERITY 

HAVE you ever had a door slammed in your face? 
If so, surprise was your first emotion, no doubt, 
then astonishment that such an unexpected thing should 
happen. This feeling probably gave way to one of 
anger, of resentment at being so uncivilly treated. 
Especially would such an occurrence irritate you if the 
weather were cold and your overcoat were behind the 
door. 

After a while a question would probably spring up. 
Who slammed the door? Why was it done? There 
was no one you could think of who might have a reason 
for closing the door against you. Perhaps it was done 
unintentionally. Or, perhaps it was the wind that 
slammed the door. 

Suppose this door were the door to success and pros- 
perity ! Would it not be interesting to know what closed 
it and why it was closed? And would it not be much 
more interesting to know how to open it and how to keep 
it from being closed? 

Well that is just what we are talking about — the door 
to prosperity. And our object is to answer both these 
questions. First we must see clearly what shuts the door 
and then we can devise a means for keeping it open. It 
will be shown that success and prosperity can be made 
accessible to all at all times. 



2 THE STRANGLE HOLD 

Of the several millions of business men who have had 
occasion to seek a loan from a bank, it is likely that a 
large majority have had the bank door slammed in 
their faces at some time or other during their career. 

The time generally comes to most business men when 
they need more cash; and to get it they naturally go to 
the logical place — -the bank. Perhaps you have been 
there and offered to put up maybe three or four to one 
in security for a loan. 

After explaining the plan and showing the security 
you are fortunate if you have never received from the 
banker the following answer: "Your securities are good, 
and your enterprise is a worthy one. We will admit it 
is a success and we would like to help you by making 
this loan, but YOUR SECURITIES ARE NOT 
BANKABLE." 

If you have received this answer you were perhaps 
angered and applied at another bank. Probably the 
same answer was received from the next banker, and the 
next, although you sought to make the loan more at- 
tractive each time by increasing the bonus or security 
offered. 

If you are a merchant or broker, and have never at- 
tempted to borrow except upon self-liquidating security, 
you may not have had an experience comparable to this ; 
but, if you are a manufacturer or producer of any kind 
— and especially a farmer desirous of extending your 
enterprise — you will certainly recognize the above an- 
swer as a set formula. 

But it may be that you are not engaged in business 
and that you have never tried to borrow money from a 



THE BAR TO PROSPERITY 3 

bank and that you never expect to. So, you may think, 
bank loans do not concern you. 

It will soon appear, however, that we are all interested 
in every bank loan for the bank door is the door to 
prosperity. 

Real prosperity is not the piling up of wealth by a 
few, but the giving of the best to the majority with the 
least effort on the part of the individual — it is the satis- 
faction of the community's wants as completely as pos- 
sible at the lowest cost. This needs no argument. 

Now, in the above example where the loan was refused 
by the bank, it has been admitted by all that the enter- 
prise is a good one. The bankers all said: "Your en- 
terprise is a worthy one." In other words, it is one 
which would result in more efficient production — in the 
end it would lead to a more complete satisfaction of 
society's wants at a lower cost. It would lead to greater 
prosperity. And the one thing that was still necessary 
to the success of this enterprise was a loan from the 
bank. The loan was refused although the security was 
good. The enterprise could not be carried out because 
a good security was not bankable. The only conclusion 
is that the banker acted as a hindrance to prosperity. 

It seems then that something is wrong, and that this 
something is concerned with the bank. But do not pro- 
ceed at once to blame everything upon the banker. Re- 
member, it may have been the wind that slammed the 
door. 

Let us proceed further, and see if there is anything 
more to be noted which will show us where the fault is* 

Since the farmer is one of the most important mem* 



4 THE STRANGLE HOLD 

bers of our industrial organization, food being the 
first of our necessities, and it being the farmer's busi- 
ness to supply it, let us take his case. 

When the farmer is in need of a loan, and applies for 
it at the bank, what happens? He is willing to give 
perfectly good security — a mortgage on his farm. The 
loan is nevertheless refused, because the security, while 
good, is not bankable. 

Unable to get the necessary facilities for carrying on 
business the farmer cannot carry out his projected im- 
provement, and society suffers from a lesser degree of 
prosperity than would otherwise have been possible. 

An effort was made to assist the farmer through the 
adoption of the Farm Loan Act in 1916. Without en- 
tering extensively into this matter, it will be sufficient 
at this point to say that this act was of some assistance. 
It provided a cumbersome means by which the farmer 
could obtain some of the capital necessary for per- 
manent improvements. But while it did some good, it 
was at best very deficient. And furthermore, the passing 
of a special law to give financial relief to the farmer 
is in itself a confession that the banking system, the 
ordinary means of supplying credit, is inadequate. 

That the Farm Loan Act did not overcome the in- 
adequacy of the banking system as regards the farmer 
is proved by the fact that Congress has recently re- 
instated the War Financing Corporation. 

This institution was erected during the war for the 
purpose of financing industry made necessary by war 
but now it has been rehabilitated as another means of 
taking care of the farmer's financial needs. It will not 



THE BAR TO PROSPERITY 5 

do the work required of it for it cannot reach the "sore 
spot" as will presently be shown. 

When the exporter's troubles began to get on our in- 
dustrial nerves Congress passed what is known as the 
Edge Act as an amendment to the Federal Reserve Act. 
Under this law a large group of bankers is now attempt- 
ing to form a Foreign Trade Financing Corporation with 
the hope of reviving our drooping export and shipping 
business. There is no hesitancy in saying that even if 
they succeed in putting it together it will not solve the 
problem. In fact its influence will hardly be noticeable. 
The reason for this statement will appear in the chapter 
on "Foreign Exchange." 

All these various acts and the Federal Reserve Act 
itself, as it stands today, are but patches on a financial 
system that can be made practically perfect by a small 
dose of American common sense properly administered. 

What is necessary and how to do it in order to set 
the wheels of industry humming and restore prosperity 
will be clearly shown as we progress. 

The case of automobile dealers at the present time is 
another example that is to the point. The Federal Re- 
serve bank will rediscount no "automobile paper" except 
that based on machines used for commercial purposes. 
All other dealers are, as a result, unable to obtain the 
facilities to carry on business for the banks will not dis- 
count paper secured by their stock-in-trade of automo- 
biles. 

Here is another instance in which our present banking 
system is not only inadequate but works a very great 
hardship. It is another instance in which the banks fail 



6 THE STRANGLE HOLD 

to supply all the needs of the community which they 
should satisfy. Automobiles are today a recognized need 
of the community. The automobile dealer is, therefore, 
a necessary factor in our commercial organization. But 
these dealers cannot obtain the commercial facilities 
they need in order to carry on business. 

The present selling plan for automobiles, where the 
dealer takes a cash payment of about a third of the price 
and the balance in notes running from ten to twelve 
months, was built up through the cooperation of the 
banks. The banks were glad to discount this paper 
especially after the automobile dealers had gotten in- 
surance companies to insure the automobile against theft, 
fire and embezzlement. 

It took several years and much thought and energy 
on the part of the automobile trade to build up this 
selling plan and to educate the public to use it. All the 
dealers' calculations were based on this selling plan and 
the factory depended upon it for its funds. 

Unless the banker continues to discount this paper 
the dealer cannot pay the manufacturer for his goods 
except he cashes his paper by paying excessive discount 
to private parties, and the manufacturer is not in a 
position to wait for payment until the cars are paid for 
in full by the purchaser. 

Here we have the proper scope for the functions of 
the bank — to lend money upon good security. The 
security offered is the stock-in-trade itself — the automo- 
biles. Such security has proved to be good but the bank 
will not or cannot carry the paper and the community 
suffers. 



THE BAR TO PROSPERITY 7 

No one, calling to mind our present industrial tur- 
moil, business uncertainty, and social unrest, will be dis- 
posed to doubt that a wrong exists. It also seems quite 
clear that this wrong is intimately concerned with our 
banking system. It cannot be denied that there is a 
flaw in a system which refuses the farmer a loan be- 
cause his security is one of property. It is also clear 
that a system which disrupts the second largest business 
in the country — the automobile trade — without warning 
and with very harmful results is dangerous and ineffi- 
cient. The present state of our foreign trade and ship- 
ping business is another glaring example. But before 
proceeding further in our search of the flaw, let us con- 
sider the commonly accepted explanation of present bad 
conditions. 

As usual, laborers are blaming the capitalists, and 
capitalists the laborers, although neither party is very 
sure of what the other is, nor why it is responsible for 
present bad conditions. 

The manufacturers and jobbers are complaining of a 
"Buyers Strike," the financiers say the trouble is due 
to "Frozen Credits," the economists tell us "Liquidation" 
must take place before prosperity returns, and the press 
says we must get back to "Normalcy." 

These high sounding phrases, at present popular with 
financial writers, will be explained later but first let us 
examine what is, or rather was, given as the most popular 
explanation for bad conditions. 

For a year or so after the close of the war the com- 
mon disturber of the peace and happiness of the country 



8 THE STRANGLE HOLD 

was said to be the "High Cost of Living." Everything 
that was wrong was due to the "H. C. L." 

This "High Cost of Living" is another catchy phrase. 
It seems to invite and hold hostility, like the word 
"witch," or "hobgoblin," and like those words, it has no 
exact meaning. Another good thing about all such terms 
is that they do not accuse anyone in particular of 
wrong-doings so they are convenient for our statesmen 
and other economic doctors to use in describing a patho- 
logic condition of the social organism. 

In the recent campaign against the "High Cost of 
Living," it became generally accepted that the H. C. L. 
was the result of a large group of men doing business 
at a profit^ and who consequently were known as "profi- 
teers." This group was so large and scattered that it 
took in a good percentage of the people of the United 
States. But the politicians had to make a pretence of 
hurting some of the big fellows, in order to appease the 
public; so five packers of Chicago were chosen, by com- 
mon consent, to be the object of Congressional investiga- 
tion. While this action may not seem entirely fair to 
the packers, no sympathy need be wasted on them, for 
they were not greatly hurt. 

In spite of all this campaigning there was no break 
in the price of commodities. The High Cost of Living 
remained until the banks decided it was time to "de- 
flate," that is, shut the door. This action brought down 
some prices in a hurry and is now bringing down wages 
so it is not giving general satisfaction. It has also caused 
business stagnation and unemployment with a decrease 
in bank clearings and an increase in business failures, 



THE BAR TO PROSPERITY 9 

so the lowering of prices has aggravated rather than 
solved the problem. 

Although no one has a very clear idea of what the 
term "High Cost of Living" means, everyone will say 
that it has something to do with high prices. The re- 
tailer says he has to charge high prices because of high 
expenses, and because of high prices charged him by the 
manufacturer. The manufacturer says he has to charge 
high wholesale prices because of the high wages he has 
to pay and because of the high cost of raw material and 
everything else he has to buy. 

In general, then, the social and commercial disturb- 
ance and unrest is blamed upon high prices, as being 
the cause of the high cost of living. 

During President Cleveland's second administration, 
back in the '90s, there was no complaint about high 
prices. Corn was so cheap it was being used as fuel. 
Eggs could be bought for ten cents per dozen. Clothing 
and shoes were about one half of their present price. 
However, there was great business depression and a 
similar amount and degree of social unrest. At that 
time conditions were the reverse of what they are now or 
were recently. When the H. C. L. was the topic of the 
day wages were high, there was a job for everybody, who 
wanted one, business was good and high prices prevailed. 
During Cleveland's time when prices were low, we had 
starvation wages, unemployment, business failures, soup 
kitchens, Coxey armies and panic. And as a result, 
what we recently blamed upon the High Cost of Living, 
was then blamed upon the Low Cost of Living. 

Just as conditions during the '90s were the reverse of 



10 THE STRANGLE HOLD 

what they were when the H. C. L. was the great bugaboo, 
so the remedies proposed then were the reverse of those 
proposed to overcome the H. C. L. 

It will be remembered that Mr. Bryan made a presi- 
dential campaign in 1896 on a platform that declared 
for the free and unlimited coinage of silver at the ratio 
of sixteen to one. The argument was that the price of 
wheat followed the price of silver, and as the price of 
wheat was the barometer of all prices the way to raise 
prices was to restore the price of silver to $1.29 per 
ounce. Raising the price of silver would raise the price 
of wheat correspondingly, and all prices would follow 
the upward trend. 

In other words, prices then were low, and the remedy 
proposed was one designed to raise prices. When prices 
were high, it was almost universally believed that the 
only efficacious remedy was to lower prices. 

The theory when Bryan ran for president the first 
time was that a low price for commodities caused low 
wages and business stagnation, which was an economic 
calamity to be avoided, and the remedy suggested was 
to raise prices. 

The theory during the extreme high price period 
seemed to be that high prices, with their accompanying 
effects of good wages, plenty of work, profitable business 
and a high standard of living produced a bad economic 
condition which should have been remedied by lowering 
prices through government regulation or by deflation. 

If the H. C. L. were the cause of industrial turmoil 
our condition now should be most serene for many prices 
have recently taken a violent fall. This fall in prices, 



THE BAR TO PROSPERITY 11 

however, does not seem to be giving satisfaction. The 
agricultural interests are making continuous efforts to 
secure credit for the purpose of holding their crops for 
higher prices. They have pleaded with the banks, the 
Federal Reserve Board and the President for help. 
They asked that the war time Government financing cor- 
poration be reinstated to save them from financial ruin. 
They are now forming marketing associations and the 
bankers are trying to form foreign trade corporations 
under the "Edge Act" with the avowed purpose of rais- 
ing prices. The situation makes the argument that our 
economic condition is due to prices ridiculous. 

It is illogical to blame at one time the High Cost, and 
at another the Low Cost of Living, for the same results, 
and to suggest identically opposite remedies. 

And, as a matter of fact, if we compare our conditions 
under high prices, with those that existed a few years 
back under low prices, we are forced to admit that the 
majority were really better off under high prices than 
when prices were low. Never was there a time when 
the majority of the people enjoyed so many comforts 
and luxuries with so little expenditure of time and 
effort as they did when prices were the highest. Things 
which the most humble citizen of today regards as neces- 
sities were but a few years ago regarded either as the 
greatest of luxuries, or else were unobtainable. Present 
living and working conditions are so improved for the 
majority of the people that it is hard to realize that the 
old adage: "Man works from sun to sun, but a woman's 
work is never done" expressed the literal truth as to 
conditions existing only a short time ago. 



12 THE STRANGLE HOLD 

On the other hand, if we compare the prices current 
today with those current a few years ago, we must admit 
that they are much higher now. And if we compare 
them with those of some time ago, we shall see that they 
have gone up tremendously. 

This condition and the fact that both in the case of 
the Low Cost of Living and of the High Cost of Living 
the remedies proposed were concerned with alterations 
in prices, all point to the same solution. The trouble 
seems to be in the dollars themselves, and not in the 
living. If prices remained at a constant level, whether 
that level were low or high, wages and prices would ad- 
just themselves. For prices are nothing more than the 
exchange ratios of all commodities and services, ex- 
pressed in terms of money. Any disturbance of these 
ratios leads to a need for readjustment, and it is the 
friction incident to this readjustment that is the real 
cause of our troubles. 

Let us see how this works out in regard to conditions 
we have experienced. 

The war caused a pressing demand for large quanti- 
ties of various commodities at a time when a great num- 
ber of men were withdrawn from productive pursuits. 
The demand for labor increased at a time when the«^ 
supply of labor had been decreased. This condition 
caused wages to go up. High wages in "war-industries," 
drew labor from other industries, thus lessening the 
supply, and tending to raise wages in these industries 
too. As a result, there was a twofold tendency to 
raise prices: in the first place, higher prices had to be 
charged in order to make it possible to pay the increased 



THE BAR TO PROSPERITY IS 

wages; and in the second place,, the workers were able 
to buy more with their increased wages — their effective 
demand increased, resulting in better business and higher 
prices. 

At the same time large quantities of credit were issued 
in this and in other countries in order to pay for the 
goods made necessary by the war. The effect of these 
new issues of credit was to "inflate" the medium of ex- 
change — there were now more dollars in circulation; in 
consequence of which the "price of the dollar/' that is, 
the amount of other commodities one dollar would ex- 
change for, decreased. Prices rose. 

The war, therefore, had a twofold effect in raising 
prices, and the result was consequently doubly great. 
As a result, there was all the more friction in the at- 
tempted readjustment, and it is the lack of adjustment 
that is the cause of our present troubles. 

If every exchangeable ratio moved simultaneously and 
to an equal extent — that is, if prices, wages, interest, 
profits, and rents rose and fell equally, there would be 
no such trouble. But they do not; nor is the readjust- 
ment equal in all branches of our social organization. 
Those who produced the commodities, and those who 
rendered the services which were not directly affected 
by the demands of war — the public service corporations, 
landlords, preachers, teachers, actors, and government 
employees — all were losers by the rise in prices at first 
because the readjustment of income to expenses was 
slower in their cases. 

Such are the troubles of inflation of the currency, 
the troubles of the High Cost of Living. The troubles 



14 THE STRANGLE HOLD 

of the Low Cost of Living are concerned with contrac- 
tion of the currency. Both inflation and contraction 
change the purchasing power of money and therefore 
effect prices. More definitely, they are concerned with 
the varying price of the dollar — or the changing value 
of the dollar. The only way to remove these troubles 
is to make the dollar a constant measurement of value — 
to have a medium of exchange that can neither be in- 
flated nor contracted. 

An illustration will make this clear. Suppose the 
length of a foot-rule were to vary with the supply of and 
demand for wood. What havoc would be caused in all 
our dealings ! Luckily a foot is always twelve inches, 
whatever the price of wood, for it is the same whether 
measured by a foot-rule of wood, steel, or tape. Simi- 
larly if a dollar were always the same, whether mea- 
sured in gold, silver, wheat, or any other commodity, 
the greatest of our social evils would disappear. 

The problem, then, is not to meddle with the High 
Cost of Living, nor with the Low Cost of Living, but to 
remove industrial and social friction by removing their 
cause. This cause is the varying price of the dollar, 
and is due to a defect in our monetary system. 

The purpose of this somewhat extensive digression, 
now becomes clear. In the earlier pages of this chapter 
it was demonstrated that the fullest development of 
prosperity was prevented by some flaw in our banking 
system. In the latter half it has been shown that the 
great social and industrial unrest that is continually 
making itself felt is due to a flaw in our monetary sys- 
tem. It follows, then, that all these troubles can be 



THE BAR TO PROSPERITY 15 

removed by correcting these flaws. The purpose of this 
book is to show definitely where these flaws are, and to 
suggest a practical way of removing them. 

It is clear that this task would be simplified if it 
could be shown that both these flaws are really one: 
that they are results from the same causes, and can be 
corrected by the same remedy. 

As a matter of fact, this is the case. It is a common 
belief that banks are largely, if not altogether, con- 
cerned with money. This idea may require revision, but 
if it can be proved that the banks are in entire control 
of the medium of exchange, then it will follow that 
the flaw in our monetary system is a part of the flaw 
in our banking system, and that to correct the latter 
will correct the former. 

Before showing where the flaw is, therefore, we will 
see how both faults are inextricably bound up with each 
other, so that both problems are really one. 

The first step then is to show that the banks have sole 
control over our medium of exchange — and this will be 
the purpose of the next chapter. 



CHAPTER II 
EVOLUTION OF OUR EXCHANGE SYSTEM 

BEFORE we go further in our search for a solu- 
tion of our problem let us by a glance at world 
conditions today note the need for a solution. 

In Europe we find unemployment and want in prac- 
tically every country. In Asia want extends to starva- 
tion for thousands, even millions of people. 

In the United States warehouses are filled with wheat, 
other food products, cotton, wool, copper and practically 
everything the rest of the world wants. And yet 
business lags and labor is unemployed. 

Consider these facts and ask yourself: "What is the 
trouble ?" 

Europe and Asia are suffering from a lack of supply 
while our business slump is due to a lack of demand. 
There is plenty of desire for what we have to sell but 
not much demand. 

The rest of the world want to buy our goods and we 
want to sell them. Our harbors are filled with ships 
falling to decay for want of a cargo. Our railroads are 
seeking to cut wages because of lack of business due to 
a falling off in freight. 

With our warehouses full, with plenty of transporta- 
tion facilities, with people all over the world crying, 
even dying, for what we have for sale, why do we not 
sell, revive business and bring back prosperity ? WHY ? 

16 



EVOLUTION OF EXCHANGE SYSTEM 17 

That is the question we must answer. And it must be 
a practical common sense answer that can be put into 
effect, so as to overcome these conditions and bring 
peace and prosperity to a troubled world. 

The trouble is plainly in our exchange system. It has 
broken down. The means by which we carry on busi- 
ness, our financial system, is at fault. It is inadequate 
to facilitate the exchange which makes business possible 
so the whole world suffers. 

A few cases wherein our present system fails to sup- 
ply the needs of business such as that of the farmer and 
others have been pointed out. In this and the following 
three chapters the reasons for this failure will be shown 
and in chapters VII and VIII a simple way of over- 
coming the trouble will be given. 

Now that we recognize that our prosperity and the 
reconstruction of the world depend on a correct solution 
of this exchange problem we can proceed. 

As was stated in the last chapter, the next step in 
solving the problem before us is to show that all the 
evils resulting from the varying price of the dollar, 
and all the hindrances to progress resulting from lack 
of credit facilities are due to some defect in our banking 
system. Also that both these defects owe their origin 
to one and the same cause. 

In the one case we saw that the evils were due to a 
defect in the monetary system, and in the other case to 
a defect in the banking system. If it can be shown 
that our circulating medium — our. money — is entirely in 
the control of our bankers, it will follow that the evils 
are all due to the same cause. 



18 THE STRANGLE HOLD 

In order to do this we must have a clear idea of what 
our monetary system is, so it will be necessary first to 
touch upon the more important phases in the history of 
the development of money. 

Primitive exchange, it is easy to see,, proceeded by 
means of barter. One man would exchange that which 
he had directly for that which he wanted. But this 
method had great disadvantages. For instance, one 
might find that the man who owned that which he de- 
sired did not wish to exchange it for that which he had 
to offer. Suppose one man had a bear-skin, which he 
wished to exchange for food. Another man might have 
some surplus food, but he might not want a bear-skin. 

And even if he did desire a bear-skin, he might not 
have enough food to exchange for one. Or the man 
with the bear-skin might desire only half a bear-skin's 
worth of food, desiring in addition something else which 
the other man did not possess. Such an example, crude 
as it is, serves to indicate some of the great difficulties 
of barter. 

Sometimes, however, a man would be willing to take 
in exchange for something he had, some object which 
he did not want himself, but which he could be sure 
some one else would want. This was the first step taken 
in the development of a medium of exchange. For 
instance, the man would be willing to take the bear-skin 
in exchange for his food, if he could be practically cer- 
tain that some one else would want such a skin, and 
would give in exchange for it something which its pos- 
sessor wanted more than he wanted the skin. 

Naturally those things which were most in demand 



EVOLUTION OF EXCHANGE SYSTEM 19 

came to be accepted most readily. Shells, teeth, and 
other articles prized for ornamental purposes would 
pass from hand to hand in exchange for things that were 
desired more urgently. Even more perishable commodi- 
ties have been used in this way, such as dried fish and 
tobacco — but obviously these could not remain in cir- 
culation very long. Consequently the more lasting ar- 
ticles took the place of the more perishable as a medium 
of exchange. 

From this situation it is easy to understand how the 
metals, on account of their durability, and the more 
precious metals especially, on account of the convenience 
in carrying them, came to be used almost exclusively in 
acts of exchange. Gold and silver came to be used 
universally to carry on trade. A subsequent develop- 
ment was the process of coining, by which certain 
weights of these metals were struck with a stamp to sig- 
nify their weight and fineness. 

Since everybody was willing to accept gold or silver 
in return for goods, gold and silver became the most 
convenient "storehouses of value." Whoever had more 
goods than he needed, would exchange the surplus for 
gold or silver and the metal being non-perishable and 
always acceptable could be put by against a time when 
he would need other goods for which he could exchange 
the metals. And in order to guard against theft, he 
would look around for the safest place to keep them. 

Goldsmiths, since they worked in the precious metals, 
always had to have a supply of gold and silver on hand, 
so they had strong-boxes in which to store them safely. 
It became a custom for them to oblige their patrons by 



20 THE STRANGLE HOLD 

also storing the gold of these patrons. In return for 
the metal deposited with them they would give a receipt. 

Since gold could be had to the amount called for upon 
presentation of these receipts, people came to look upon 
them as being as valuable as the metal itself. The 
goldsmith was trustee for the gold which gave the re- 
ceipts their value, and so people began to transfer them 
or came to use these receipts as money instead of the 
metal. Since gold could be had in exchange for them for 
the asking, people were ready to accept these receipts 
the same as gold in return for their wares. They were 
even more acceptable, sometimes, on account of the 
greater ease of handling, consequently the gold itself 
was seldom demanded. 

Meanwhile the goldsmith, finding that no one came 
to ask for the gold which had been deposited, or at any 
rate, that very few did, began to issue receipts against 
which no gold had been deposited. People would ac- 
cept these receipts as willingly as those for which gold 
had been deposited, for they did not know the difference. 
And so long as the goldsmith could pay metal in ex- 
change for all receipts that might be tendered, so long 
it did not matter whether there was a full amount of 
gold behind the notes or not. The only thing the gold- 
smith had to do in order to keep his receipts passing as 
money was to keep people thinking that there was gold 
behind them, and this he could do so long as he was 
able to pay gold on demand. 

The very same principle is behind all our issues of 
paper money today. As long as people are confident 
that they can get value in return for paper money, they 



EVOLUTION OF EXCHANGE SYSTEM 21 

will accept the paper as readily as gold, and in some 
cases even more readily. And a similar principle lies 
at the bottom of our bank check system. If only people 
are confident that they will be able to get money in 
payment of the check, they will be willing to accept the 
check in return for their wares. 

Most people today think that business is carried on 
by means of money. Some there are, indeed, who 
think that it is really carried on by means of gold, 
since the paper money that is used calls for gold, and 
gold can sometimes be had for it on demand. 

But as a matter of fact this is not the case. Bank 
Credit is almost entirely our medium of exchange. To 
be more exact, the report of the Comptroller of the Cur- 
rency of the United States for 1919 shows that we do 
about 95% of all our business by the use of checks. 
The report says (Page 36, Vol. 2), that our medium 
of exchange is made up as follows: 

Gold 60% 

Silver . 40% 

Paper (all paper money of govern- 
ment issue) 4.90% 

Bank Credit (bank deposits trans- 
ferred by check) 94.10% 



100.00% 



This table was made up in 1909 before the Federal 
Reserve System was established. Since its establish- 
ment our paper money consists almost entirely of federal 
reserve notes and national bank notes, both of which are 



22 THE STRANGLE HOLD 

in reality bank credit, so our medium of exchange now is 
more than 99% bank credit. 

From the foregoing it is evident that BANK CREDIT, 
or credit on the bank's books, is practically our sole 
medium of exchange. Government money consists of 
change only and is used for the lesser transactions where 
it would be inconvenient to draw a check, as for instance, 
to pay for a lunch or car fare. 

Since bank credit then is the medium by which trade 
is conducted and which moves and controls all our indus- 
tries and through them regulates our lives, it should not 
only be interesting and profitable, but it is essentially 
necessary, that we should understand clearly what bank 
credit is, and how it comes into existence. To do this 
let us follow the operations of a bank. 

After obtaining its charter, our bank begins business 
with, we will say, a paid up capital of $10,000. The 
people of the community then deposit gold or other cash 
to the amount of $50,000. This fifty thousand dollars 
becomes the property of the bank, subject to the right 
of withdrawal by the depositor, and the bank statement 
appears as follows: 

RESOURCES LIABILITIES 

Cash $60,000 Capital .. .$10,000 

Deposits . . 50,000 



$60,000 $60,000 

The banker knows from experience that some of his 
customers will bring in, on an average, as much money 
as others draw out, so the sixty thousand dollars in cash 



EVOLUTION OF EXCHANGE SYSTEM 23 

is usually on hand all the time. If his customers would 
continue to draw out money he would have to close his 
doors. We will therefore assume that the $60,000 re- 
mains constant. From this fact the banker naturally 
infers, as did his predecessor the goldsmith, that if the 
bank's ten thousand dollars are accepted by the public 
as a guarantee for fifty thousand dollars, then the whole 
sixty thousand dollars in cash will serve as a guarantee 
for a much larger sum. So the bank begins to "lend 
money. ,> 

In this transaction the regular procedure is as fol- 
lows. The would-be borrower makes out an application 
for a loan in which he states the amount desired and 
the time for which it is wanted. He enumerates the 
securities he proposes to furnish with his note and 
states the use he intends to make of the money. The 
banker hands this list of securities to the bank appraiser 
for valuation. Accompanied by the appraiser's report, 
the application then goes before the finance or loan 
committee of the bank for action. This committee is 
usually composed of five or more members of the board 
of directors, who meet at least once a week to pass on 
applications for loans, especially on those of new bor- 
rowers. This committee may accept or reject the loan 
applied for> or it may allow only a portion of it. Let 
us say that the report of the bank appraiser is satis- 
factory and the action of the loan committee favorable, 
so that a loan of one thousand dollars at six per cent 
for ninety days is made to the applicant. 

The loan is consummated by the bank taking the note 
of the borrower and his security and writing on the 



24 THE STRANGLE HOLD 

credit side of his pass book, "$985.00/' representing 
one thousand dollars discounted at six per cent for 
ninety days. On the debit side of the bank's books 
appears the entry: "Loans and Discounts, $1,000 ;" on 
the credit side "Deposit, $985. 00" and "Discount, 
$15.00." The bank statement now reads: 

RESOURCES LIABILITIES 

Cash $60,000 Capital $10,000 

Loans and Deposits 50,985 

Discounts .. . 1,000 Discount or 

Profit 15 



$61,000 $61,000 

Here it is seen that the loan appears as an asset on 
one side of the ledger under the head of "Loans and 
Discounts" (and properly so, because the bank has the 
borrower's note and security), and on the other side of 
the account it appears as a liability, being added in with 
the cash deposits, just as if it were $985.00 in gold that 
the borrower had deposited. The other fifteen dollars 
discount or interest is profit to the bank on the trans- 
action. An analysis of this transaction shows that the 
banker has done exactly what the goldsmith, used to do. 
He has given the borrower a receipt for a deposit of 
money though no money has been deposited. 

The fiction is that the banker has handed the bor- 
rower $985.00 in money for his note, payable in ninety 
days, and the borrower has gone to the receiving teller's 
window and deposited the money. The result in the 
bank's records and in the borrower's pa<*s book lis 



EVOLUTION OF EXCHANGE SYSTEM 25 

exactly the same as if that had actually been done. 
Even if the borrower had taken the cash out of the 
bank and deposited it in some other bank, or after 
receiving credit for the deposit had withdrawn it and 
spent the money in the community, it or its equivalent 
would soon return to the first bank, and the bank's cash 
and deposits would therefore remain about the same. 

Let us suppose the borrower in this case draws a 
check for the full amount of the loan in favor of some 
creditor or to pay for goods. The loan is still a deposit 
although it is no longer to the borrower's credit. The 
deposit is transferred to the credit of the person receiv- 
ing the check. If that person keeps his account in the 
same bank the transfer consists merely of charging the 
borrower's account and crediting the new owners and 
giving credit in the new owner's pass book. But if the 
new owner of the credit keeps his account in another 
bank he deposits the check there and receives credit for 
a deposit. The credit is then transferred from the 
lending bank to the second bank. 

The transfers between banks made necessary by such 
operations are made by what is called a clearing. That 
is, the orders or checks against bank No. 1 presented by 
bank No. 2 are cancelled against the orders or the checks 
on bank No. 2 in favor of bank No. 1 and only the bal- 
ance left after the cancellation is complete is paid in 
money. For instance if the checks on bank No. 1 pre- 
sented by bank No. 2 amount to, we will say, $916.50 
and the checks on bank No. 2 presented by bank No. 1 
amount to $1,075.50 then the clearing or cancellation 
would show a balance of $1,075.50 minus $916.50 or 



26 THE STRANGLE HOLD 

$159.00 due from bank No. 2 to bank No. 1 which is pay- 
able in money. 

The more nearly all the business of the community is 
carried on by checks and drafts the less money is 
required to pay balances. If all the business were car- 
ried on by checks all transactions would cancel and 
there would be no balances, just as a set of double 
entry books must balance when they are correct. It 
would be simply a transfer of credits from one account 
to another and all the banks would constitute just one 
big bank. 

The point to be particularly noted is that while the 
loan we are examining is stated in terms of money no 
money is used in the transaction. It is credit and while 
it may sometimes be turned into money, or what we call 
money, at least 95% of it never is, but is transferred 
from one to another by means of checks and always re- 
mains a bank credit or deposit. This fact is shown by 
the statement already given from the Comptroller's re- 
port. 

The popular idea that the bank lends the depositors' 
money is in fact a delusion. What really happens is 
that the bank lends its credit to whomsoever it will, tak- 
ing in exchange for it the borrowers less known credit 
plus his security. The bank turns out its credit in two 
general forms — bank notes and bank deposits. 

The fiction by which the banker gives the borrower 
credit for a deposit is convenient, and, in itself, harm- 
less. But like any other fallacy, when the fact that it 
is a fiction is lost sight of, and this transaction is mis- 
taken for a money transaction, then it becomes danger- 



EVOLUTION OF EXCHANGE SYSTEM 27 

ous. We will return subsequently to a discussion of the 
effects of this fiction, continuing for the present with 
the analysis of this bank's operations. 

The bank, up to this stage, has coined but $1,000 of 
our medium of exchange, of which $15 is profit. Now 
it goes on making loans in the same way up to say two 
hundred thousand dollars. It does not seem possible for 
a bank with but ten thousand dollars capital and fifty 
thousand dollars cash deposits to lend two hundred 
thousand dollars. However, this is not only possible, 
but, what is still more remarkable, the bank will still 
have left the sixty thousand dollars in cash and probably 
more. Our bank's statement would then be: 

RESOURCES LIABILITIES 

Cash $ 60,000 Capital $ 10,000 

Loans and Deposits 247,000 

Discounts . . 200,000 Profit 3,000 



$260,000 $260,000 

Like any other sleight of hand this magic is very 
simple when explained. The banker is not lending the 
depositors' money, as is commonly supposed, nor any 
other money. He is lending the bank's credit. 

The amount of credit which our little ten thousand 
dollar bank with its fifty thousand dollars of real money 
in deposits can lend, depends upon whether it is a state 
or a national bank, and upon the nature of its deposits. 
Most state laws, like the national bank law, require 
each bank to carry a certain cash reserve, the amount of 
which depends upon the law governing the bank, the 
kind of accounts the bank carries, and whether it is a 



28 THE STRANGLE HOLD 

country or a city bank. This money is called the legal 
reserve, and represents a certain percentage of the 
deposits which must be held either in the bank's own 
vaults in the form of cash or approved securities, or to 
its credit by a reserve agent. This cash reserve is nec- 
essary as a bulkhead against the loss of public con- 
fidence. It is ready money with which payment can be 
made in case of a sudden demand from frightened de- 
positors. For this reason, bank laws require a larger 
reserve against demand deposits than against savings 
deposits, because the latter are protected by the require- 
ment of notice before withdrawal. The time given by 
this notice gives the bank an opportunity to realize upon 
its assets, should such need arise. The legal reserve 
ranges from nothing in some states to twenty per cent 
in others. 

Let us assume that our little bank is required to keep 
a 10% reserve. Then for every dollar it has in cash 
or on deposit with a reserve agent it can carry $10 in 
deposits. We have assumed that the bank has $60,000 
so with this amount as reserve it can run its deposits up 
to ten times that amount or $600^000. Of this amount 
fifty thousand dollars are deposits of cash, which, de- 
ducted from the $600,000 fixed by the legal reserve law 
as the limit of deposits, leaves a balance of five hundred 
and fifty thousand dollars of deposits which the bank 
can create by making loans. The deposits — bank credit 
— created by these loans passes for money in the shape 
of checks and drafts and are in no way distinguishable 
from the dpeosits — bank credit — created by deposits of 
cash. If the legal reserve requirement then is ten per 



EVOLUTION OF EXCHANGE SYSTEM 29 

cent, for every dollar of real money deposited or paid 
in for stock and held, the bank can issue or lend nine 
dollars of its credit for use as money. 

And even bank reserves, it may be said, are not always 
money. Some states permit banks to count as reserves 
the bonds of that particular state and the notes of 
national banks. Neither of these are money, but only 
promises to pay money. 

In the first chapter we saw that the causes for the 
social unrest of today and its attendant evils arise out 
of that defect in our monetary system which is 
responsible for the varying price of the dollar — or, in 
other words, for varying prices. The phenomena known 
as the High Cost of Living and the Low Cost of Living, 
and the distressful conditions that are the result of 
these phenomena are due in their entirety to the unstable 
value of the dollar. 

In this chapter we have seen that the greater part 
of our money is bank credit. We have seen that at least 
ninety-five per cent of our circulating medium — of our 
money — exists in the form of bank deposits. And we 
have furthermore investigated the way in which this 
bank credit is created, and have seen that bankers are 
alone responsible for its issuance, that they can increase 
it by granting loans or curtail it by refusing them as they 
see fit. They can also grant a loan to one and refuse it 
to another at will. 

Putting the conclusions of these two chapters to- 
gether, it at once follows that the industrial evils 
described are due to some defect in our banking system, 



BO THE STRANGLE HOLD 

since it is this system which controls our circulating 
medium. 

Furthermore, we saw that under the present system 
the banker is acting as a brake on the wheels of pros- 
perity; we noted,, however, that this was not necessarily 
the banker's fault, but may be due to a defect in the 
system which does not permit him to extend credit 
wherever credit should be extended in the furtherance 
of the best interests of society. 

We have now shown what we started out to show. It 
is now clear that both series of problems and defects 
referred to in the first chapter have a common origin. 
They are both due to a defective system of issuing bank 
credit. The problem, then, which at first seemed a two- 
fold one, is now seen to be one — the problem of cor- 
recting the defect in our banking system. It is the 
problem of devising a remedy that can be applied to 
existing institutions without disturbing business or up- 
setting commercial relations. 

But before doing this, it is necessary to see clearly 
what the defect is. This is our next step. 



CHAPTER III 

THE MEDIUM OF EXCHANGE 
A PUBLIC UTILITY 

IN the preceding chapter it was seen that all but a 
relatively insignificant percentage of our commerce 
today is carried on by means of bank credit — in other 
words, that bank credit is our present medium of 
exchange. 

And it was shown that in the development of com- 
merce, one means of changing ownership after an- 
other came to be used. As commerce outgrew the means 
in use another had to be supplied. 

It was noted that primitive barter, because it was too 
cumbersome and unsatisfactory, gave way to the practice 
of using one or two commodities as a medium of 
exchange. Gradually the commodities that were best 
adapted to this use — gold and silver — came to replace 
other commodities, shells, tobacco, iron, copper, and so 
forth. Subsequently gold largely took the place of 
silver on account of its higher value and consequent 
greater efficiency. We saw finally how bank credit, 
based on gold, arose and that on account of its greater 
convenience and adaptability to the needs of modern 
industry and commerce, it has reached the position that 
it now occupies, practically all of our exchange trans- 
action being carried on through the use of this medium. 

And we have also looked into a few of the most 

31 



32 THE STRANGLE HOLD 

obvious of our industrial ills today, and have seen that 
they are connected with, or rather that they spring 
from, some defect in our monetary and banking system. 

The most natural conclusion to be drawn from these 
premises is, that, just as commerce outgrew each former 
medium used for exchange, so it has now outgrown the 
present one. 

Commerce stands in need of a medium that will give 
it freer scope for its possibilities. It must be enlarged 
so that industry will no longer be hampered by a medium 
of exchange that restricts and represses business, that 
turns it inward like an ingrowing nail, there to rankle 
and fester and breed all the economic trouble and 
industrial turmoil that afflict us today. 

Because our present system has been outgrown does 
not prove that there is anything inherently bad in the 
development of bank credit. Its use was a natural step, 
a step in advance, and by no means a step in the wrong 
direction. Its use gave industry wider scope, and so 
contributed to the advancement of civilization. 

And if now it has been outstripped by industry, this 
does not necessarily imply that it must be cast aside, 
or that a search for a new and entirely different ex- 
change medium is necessary to be instituted. 

The case is really quite the contrary. No radical 
change is necessary. All that is required will be to 
modify the method of issuing our present medium in 
order to put it on a firmer, more logical basis, and by 
removing the* fault that hampers it adapt it to present 
conditions. 

It is only necessary to modernize bank credit, and set 



MONEY A PUBLIC UTILITY 33 

it upon a more scientific footing. When this has been 
done, it will be fully adequate to all our needs. Industry 
will no longer be "limited, cribbed, confined/ ' but will 
be free to develop the immense possibilities that are 
latent within it. 

It is a most natural result that enlarged business re- 
quires enlarged facilities for doing business. All our 
efforts in achieving this improvement, by reorganizing 
our methods, will be repaid a thousand-fold. 

But before attempting such a task, we must see more 
clearly just where our present system is at fault; we 
must look more closely into bank credit, as it exists 
today, and determine precisely where it is inadequate. 
Then, and only then, can we seek to apply a practical 
remedy. With this purpose in mind, let us look once 
more into the way in which bank credit is created. 

Bank credit may be created in either of the following 
two ways: 

When a customer deposits money, the banker gives 
him credit in like amount on the books, and makes a 
memorandum to that effect in the customer's pass-book. 
The money deposited becomes the property of the bank, 
in exchange for which the customer receives the bank's 
promise to repay the amount on demand. In other 
words, credit on the bank's books is bank credit, and is 
created first by bank deposits. 

When a customer goes to a bank and "borrows money," 
he puts up his note with his securities, if the note be 
secured, and the banker gives him credit for the amount 
he has borrowed in the same way as he gives the cash 
depositor credit for his deposit. The banker makes the 



34 THE STRANGLE HOLD 

same memorandum in a Borrower's pass book that he 
does in a depositor's. Bank credit, then, is also created 
by bank loans. 

The point in both these cases is not that bank credit 
is created by two entirely different methods, but that 
in each method the question as to whether the bank credit 
shall or shall not be created is left entirely to the banker. 
He may make the loan, or he may refuse to make it. 
If he refuses no one can compel him to alter his de- 
cision, regardless of what may be the borrower's just 
deserts. 

In the other method too, he may refuse the deposit if 
he so desires. It is not often that a banker refuses to 
let a customer make a deposit, but it is quite possible 
that he may regard some particular person's account as 
undesirable, and in that case there is no means of com- 
pelling him to accept the deposit. 

The credit thus created on the bank's books is trans- 
ferred from one to the other by checks and trade is car- 
ried on almost exclusively by its use, it is our money, so 
the bank has virtually become our mint and its operation 
is a matter of vital interest to all of us. A full analysis 
of the effect of this usurpation of a great government 
function by the bank will reveal the cause of our finan- 
cial ills. 

We have seen that THE POWER TO GRANT OR 
DENY A LOAN, AND SO THE POWER TO CON- 
TROL THE MEDIUM OF EXCHANGE, RESTS 
WITH THE FINANCE COMMITTEE OF THE 
BOARD OF DIRECTORS OF THE BANK. This 
simple act of routine business is performed every day 



MONEY A PUBLIC UTILITY 35 

by hundreds of good citizens, who would indignantly 
resent any suggestion that by this act they are usurping 
one of the most vital functions of our government — that 
of issuing our money by minting private credit into the 
medium of exchange. 

But because the bank's credit, which this committee 
controls, is our medium of exchange, and because the 
use of the medium is necessary in every walk of life, 
it is clear that on the decision of this committee depends 
individual liberty, success, and happiness, as well as 
national efficiency and progress. 

The great importance of its decisions make this little 
assemblage of business men a powerful group of auto- 
crats. Their power is the more dangerous because of the 
fact that their acts are protected from even the slightest 
public protest or criticism. Both the committee and its 
victims fail to realize the power that it wields. 

Right here, in these committees, lies concealed the 
"Money Trust" of which we hear so much. The control 
of the greatest public utility is in their hands. 

This is the clue to our entire problem. The PRI- 
VATE CONTROL OF THE MEDIUM OF EX- 
CHANGE SUBJECTS THE WHOLE COMMUNITY 
TO THE WILL OF THE FEW. 

Many will note a resemblance here to another great 
problem — the railroad problem. As many will remem- 
ber, the private, irresponsible control of the medium of 
transportation by a small group placed the entire com- 
munity within their power. 

Since a similar trouble was overcome in that public 
utility, a review of the problem presented there, and of 



36 THE STRANGLE HOLD 

the means by which it was solved should prove of con- 
siderable help in the present problem. 

In the days when railroads were entirely in private 
hands, and subject to no public control and regulation, 
the principle which governed all rates was to charge that 
rate, both for passenger and freight service, which would 
yield to the railroad lines the largest net returns, re- 
gardless of the community's interests in the matter. 

For those who remember this period in our history, no 
explanation is necessary. Our sad experience with com- 
plicated and unjust railroad tariffs, unpublished and 
secretly administered, and with rebates, drawbacks, ter- 
minal rates, quantity classifications, and an untold num- 
ber of similar abuses, will not easily be forgotten. But 
for the benefit of the younger generation, let us take 
an example. 

When railroads were privately controlled, California's 
supply of kerosene came from the East. Let us say it 
cost fifteen cents per gallon to produce kerosene in, we 
will say, Ohio, and that it sold regularly in California at 
forty cents. Then the railroad would figure perhaps a 
profit of five cents for the producer in Ohio, and perhaps 
another ten cents profit for the seller in California. It 
would then fix its rate at the difference between the cost 
plus the two profits allowed, and the selling price of 
forty cents, that is, ten cents. 

The only principle governing this rate was, "at what 
rate can that particular business be made to pay the 
railroad the most money?" 

Different rates were quoted to different shippers. 
Business success depended more on "pull" than on 



MONEY A PUBLIC UTILITY 37 

"push." A little pull with the railroad was worth any 
amount of energy and business ability. 

To demonstrate this last statement, let us continue our 
illustration a little further. 

Suppose the railroad raised the rate on kerosene from 
Ohio to California by ten cents, making it twenty cents. 
It is not likely that this increased rate would be absorbed 
by either producer or retailer. It would be shifted to 
the consumer, who would have to pay fifty instead of 
forty cents per gallon. This would result in decreased 
consumption, and consequently decreased business both 
for producer and railroad. 

But now suppose that certain of the interests produc- 
ing kerosene in Ohio also possessed a sufficient control 
over the railroad to cause the latter to rebate eight 
cents per gallon of the freight rate on kerosene to them. 
In other words, these producers would pay the railroad 
the full twenty cents per gallon rate, and later the rail- 
road would pay back to them eight cents per gallon. 
Then instead of only five cents per gallon these interests 
would make thirteen — a good compensation for the 
diminished sales. The extra two cents per gallon from 
these producers, coupled with the extra ten cents per 
gallon from other producers, who did not enjoy the 
rebate, would amply repay the railroad for the shrink- 
age in traffic due to shrinkage in consumption. 

The favored kerosene producers and the railroads 
would both be pleased with the arrangement, even though 
the demand for kerosene had diminished. 

But how about the producer in Ohio who was not 
favored, and had no compensation for the decreased 



38 THE STRANGLE HOLD 

business due to the increased price? And how about 
the consumer, who now had to pay fifty instead of forty 
cents per gallon, and consequently had to content him- 
self with a smaller quantity of kerosene than before? 

Since that time railroad service has come under public 
control. No longer are railroads permitted to increase 
rates arbitrarily, nor to favor some shippers in prefer- 
ence to others. All shippers are entitled to the same 
services, and prices no longer fluctuate at the will of 
the railroad interests. And right here let us point out 
that neither in the case of the railroads, nor in the case 
of the banks, are we interested in the operation of either 
of these public utilities, except in so far as their opera- 
tion affects the quality of the services they render. 

It is in the services that we are interested, and so long 
as all customers may know at all times what service they 
may expect, and may be sure of receiving the same 
treatment as any other customer, it is of little importance 
to us, the public, as to how that service is produced. 

Banks as well as railroads should be privately owned 
and operated, but their SERVICES should be under 
public control and regulation so that everyone may be 
certain of obtaining the most efficient service at the 
fairest cost and a service equal to that of any other user. 

Because the banks issue our medium of exchange the 
banking and railroad businesses are both public utilities. 

The only essential difference between the services 
rendered by these two utilities is that the cars of the 
railroad are employed to change the location of goods 
while the credit of the bank is used to change their 
ownership. 



MONEY A PUBLIC UTILITY 39 

In abstract principle both are the same, and the effect 
of private or public control of either has the same result. 

It is evident that as long as a privately controlled 
railroad could charge "all the traffic would bear," and 
could then rebate a portion to favored shippers, or could 
favor them in other ways, that it was practically denying 
to those shippers not favored the right to use the rail- 
roads. 

Precisely the same thing happens when a bank denies 
a customer a loan for which the customer can offer 
security. It is denying to that customer the right to 
use a medium which is much more important to him than 
the railroad. 

It is in the fact that the bank can deny anyone the 
use of this great public utility that the greatest fault 
of our present financial, industrial and social system lies. 

In order to make the analogy still clearer, we may 
compare the security offered and the rate of interest 
paid by the customer of the bank to the freight-rate 
paid by the customer of the railroad — the shipper. 

Under public control every railroad is now required to 
give every shipper, who can pay its rate, the same 
treatment as every other shipper receives. It cannot 
deny its service to any particular shipper on account 
of the prejudice or the personal interests of any person 
or group of persons who may happen to be in control of 
the railroad. 

And the medium of exchange, the service offered by 
the bank, should be under similar public control, so 
that every bank will be required to give identical treat- 
ment to every customer who can comply with require- 



40 THE STRANGLE HOLD 

ments — who is able, in other words, to offer good secur- 
ity and pay the rate of interest. The decision, whether 
to make the loan or not, should not be permitted to lie 
in the hands of private persons, who may decide accord- 
ing to their own personal prejudices or private interests. 

It may perhaps occur to some here that the force of 
competition will overcome the effect of personal pre- 
judices and private interests of the bankers. In answer 
to such an argument it is merely necessary to say that 
the force of competition does not operate, and to prove 
this statement we will again call upon our analogy to 
the railroad. 

It was thought that the free play of competition 
untouched by public regulation, would be sufficient to 
insure fair play to all shippers. The countless instances 
of rebates, secret tariffs, and similar abuses that char- 
acterized the day of unregulated railroad competition, 
proved beyond all doubt the necessity for public regula- 
tion. 

If we desire to benefit by past experience — and who 
does not? — we must apply the same rule to our other 
great public utility. 

Just as the argument that since it was the railroad's 
business to secure the transportation of goods, the 
railroad would afford the best possible treatment to all 
customers, was found to be invalid, so the argument 
that, since it is the banker's business to extend loans 
wherever possible, he will extend equal services to all 
customers, will also be found fallacious. 

There is one more point of striking similarity be- 
tween the two public utilities, the railroad business and 



MONEY A PUBLIC UTILITY 41 

the banking business, that should be referred to before 
our analogy between the services of these two utilities is 
completed. This point is the similarity in effect upon 
the community of a denial of, or break down in, the 
services of either. 

The effect of a breakdown in railroad service was 
illustrated with gripping force in Mexico during the 
Carranza regime, when thousands of Mexicans died from 
actual starvation. Beset by bandits and lacking credit, 
the government was unable to obtain adequate rolling 
stock for its railways, which were, with minor exceptions, 
federally owned. Owing to this lack of rolling stock, 
the crops could not be moved. In the agricultural dis- 
tricts corn was cheap, for it could not be sent to other 
markets, and so glutted the local markets. Business 
stopped from lack of transportation. On the other 
hand, in the mining districts, many people died from 
sheer starvation, for owing to the lack of adequate 
means of transportation, corn could not be brought in 
from agricultural districts. What corn there was con- 
sequently rose to so high a price, and was so scarce that 
many could not get it at all, and died from famine. 

Just as "contraction" of the medium of transportation 
caused hard times, so "contraction" in the medium of 
exchange causes hard times, as will be shown in the 
following illustration. 

A man, let us say, owns an unimproved farm worth 
$10,000, and is desirous of improving it. He needs, 
say, $2,500 for barns and sheds, and $3,500 for imple- 
ments, seed and running expenses until he can harvest 
his crop. He has no other means of raising the money 



42 THE STRANGLE HOLD 

except on the land. He is willing to give a mortgage 
for the $6,000 needed, agreeing to spend the money on 
improvements as stated, which will make the security 
offered, the farm, worth from twelve to fifteen thousand 
dollars. A good security for the loan of $6,000. 

The lumber agent will not let him have the lumber, 
the carpenters will not put in their work, the tractor 
men will not furnish the tractor, and the implement and 
seed dealers will not furnish his other necessities unless 
he is able to pay them. He will not be able to pay them 
until he gets his crops, perhaps not until he has sold the 
crops of a number of years. But if he succeeds in rais- 
ing the loan from his bank, he will be able to raise the 
crops and pay it back. 

If he is granted the loan, then he will be able to carry 
out his proposed improvements. The result will be in 
the immediate future, a demand for lumber, farm imple- 
ments, and labor to the extent of $6,000, and prices and 
wages will rise or be maintained as a result. In the 
slightly more distant future, the result will be larger 
and better crops, and so society will twice be benefited, 
once in increased business and again in a better supply. 

But if the loan is refused, the result will be the op- 
posite. The demand for the commodities and for labor 
will be lessened to the extent of $6,000, thus depressing 
prices and wages. And the farmer, finding no other 
outlet for his energies, and no other means of getting a 
living, will have to go to work for somebody who can 
get the use of the medium of exchange. Not only will 
the goods which he would have bought and the labor 
which he would have employed remain on the market to 



MONEY A PUBLIC UTILITY 43 

depress prices but also his labor will be thrown on the 
market, thus further depressing the wages of all labor. 
In general, then, if the loan is for any reason refused it 
is not a personal matter between the would be farmer 
and the banker for the result will be a tendency toward 
hard times and loss for the whole community. 

This denial of the use of the medium of exchange, 
then, produces "contraction," which unfailingly results 
in falling prices, lower wages, lessened production, 
fewer comforts, and a decrease in happiness just as 
inadequate railroad service does. 

Financial writers formerly blamed such evil conditions 
upon "over production." 

They calmly told us that the reason prices fell and 
business slumped was because the market was over 
supplied. 

But now, with want and starvation crying for our 
surplus, with our ships tied to the dock and the rail- 
roads suffering for lack of freight the term, "over pro- 
duction,' ' would sound ridiculous so the same condition 
is described as, "lack of demand/' 

The latest term is, "a buyers' strike." This term 
aptly describes the condition for of course all buyers 
strike, that is they do not buy, when they have nothing 
to buy with, and we have just described how the farmer, 
unable to get his loan, "struck" and went to work. 

The term "Buyers' Strike," however, is not well 
chosen, for it puts the blame in the wrong place. As 
we have seen in the farmer's case, the failure to buy was 
no fault of the buyer but was due to the banker's refusal 
to make the loan, so this failure to buy and our present 



44 THE STRANGLE HOLD 

bad condition would be much more accurately described 
if termed a "bankers' strike." 

All such terms as, "Over Production," "Lack of De- 
mand" and "Buyers' Strike" are misleading for there 
can be no over production and buyers will not strike so 
long as desire remains unsatisfied. The fact that present 
unsatisfactory business conditions are caused entirely by 
bankers and not by buyers will soon be clearly estab- 
lished. 

This condition will be explained more fully in the 
next chapter, in which we will examine closely the 
reasons for, and the results of, a denial of the use of the 
medium of exchange to whoever deserves to have its use 
extended to him. And it will be shown that the denial is 
due entirely to the private control of our greatest public 
utility. 

The farmer should have the same right to the use of 
the medium of exchange that a shipper has to the use 
of the medium of transportation. 

In the case of the shipper, the value of his shipment 
is a guarantee that he will pay for the use of the rail- 
road. With the farmer, land and crop insure payment 
for the use of the bank. And any abridgment of this 
natural right not only denies him freedom of action, but 
results in loss to the entire community. 

Due to this denial the lumber, implements, seed and 
labor the farmer would have bought remain on the market 
to depress the prices of those commodities because he 
could not buy what he wanted to buy and the crops 
which he would have raised are not raised for the same 
reason. Society, therefore, instead of enjoying a double 



MONEY A PUBLIC UTILITY 45 

gain, suffers a double loss on account of the denial. 

This is just a statement, in particular form, of what 
we have demonstrated in this chapter, namely, that the 
fault of our present financial system lies in the fact that 
the banks control the greatest public utility; a utility 
which all must use is held in private hands, and from this 
source springs practically all of our present financial, 
industrial and social troubles. 

Let us now proceed to examine in greater detail the 
effects of this private control so as to see how it pro- 
duces the hardships from which the country suffers. 

If it is proved that our present business depression is 
due to this cause our problem is then fast approaching 
solution. This fact will be clinched in the next twa 
chapters. 



CHAPTER IV 
THE INDUSTRIAL STRAIT-JACKET 

IN the last chapter it was shown, by analogy with a 
similar problem in the case of the railroads, that the 
private control of bank credit lies at the root of our 
present industrial troubles. 

In this chapter it is proposed to further investigate 
this proposition in order to show conclusively, the evils 
of private control of the medium of exchange, and 
secondly, in order to gain a more definite and a clearer 
conception of the fault so that we may be aided in our 
search for a remedy and may better appreciate the 
remedy when it is found. 

In the early part of this book we saw how a great 
part, if not all, of the evils which afflict industry, and, 
in fact, society as a whole, at the present time, are evils 
connected with the changing cost of living. In other 
words, they are due to the fluctuating general level of 
prices, or differently expressed, to the variation in the 
purchasing power or price of the dollar. 

This variation in the value of the dollar is due to the 
phenomena called expansion and contraction or inflation 
and deflation, which condition arises from the fact that 
the volume of the medium of exchange does not vary 
in accordance with the needs of business. 

It is clear that if the volume of business remains 
constant and the medium of exchange is doubled, prices 

46 



THE INDUSTRIAL STRAIT-JACKET 47 

will in the long run be doubled — that is, they will tend 
to be doubled. For now there will be two dollars to do 
the work that formerly one dollar did. 

On the other hand, if the volume of the medium of 
exchange remains the same, and the amount of business 
done, the total amount of goods produced and handled 
is doubled, then prices will tend to be cut in half. For 
now there will only be one dollar to do what two dollars 
did before; each dollar will have to be twice as effec- 
tive as before. 

But if the medium of exchange varies hand in hand 
with the volume of business, then there will be no 
fluctuation in prices as a whole. 

That is to say, if the volume of business is doubled, 
and the medium of exchange is doubled at the same 
time, each dollar will have to do just the same amount 
as before, and prices in that case will remain constant. 
The same condition will result if the medium of exchange 
and the volume of business are both halved. 

This is the object of practically every monetary re- 
form. It is the object, for instance, of the Federal 
Reserve System. But it is an object that has not been 
accomplished, for we still have our varying general price 
levels. The cost of living has not ceased to rise and 
fall since the introduction of the Federal Reserve Sys- 
tem, as has been clearly demonstrated in the past few 
years. 

It should be held in mind during this discussion that 
we are speaking, not of the variations in price of par- 
ticular commodities, but of variations in the general 
level of prices as a whole. Variations in the price of 



48 THE STRANGLE HOLD 

particular commodities are due to variations in the 
demand for, and the supply of these commodities. 

But variation in the general price level, the price of 
all the commodities consumed by a community taken as 
a whole, are due to variations in the price of the dollar, 
that is in the purchasing power of the dollar. The 
dollar value varies with the ratio between the volume of 
the medium of exchange — the number of dollars in circu- 
lation, and the volume of business transacted. 

Variations in the purchasing power of the dollar are 
the cause of industrial and social unrest and of the 
hardships connected with the fluctuating cost of living. 
These variations in living cost result in the adjustments 
t)f the mode of living to income, made necessary when 
changing from one price level to another. 

It is, as stated, the object of almost all banking and 
monetary reforms to do away with these fluctuations in 
the general level of prices. It is evident that the only 
way to accomplish this object is by an arrangement so 
that the purchasing power of the dollar shall remain 
uniform. But this end will never be accomplished until 
control of the volume of the medium of exchange is 
taken out of the private hands of the banker, for it is 
owing to his control that the volume of the medium of 
exchange does not vary in accordance with the volume of 
business. One reason for this lack of elasticity in our 
medium is because the private control of the banker 
always results in a tendency toward contraction. 

In order to demonstrate this fact it will be necessary 
first of all to show clearly what we mean by the terms 
contraction and expansion. This can be most easily 



THE INDUSTRIAL STRAIT- JACKET 49 

done by having recourse once more to our analogy to the 
railroad. 

Contraction of the medium of transportation means 
that there are not enough railroad facilities to carry on 
the business of transportation. This situation occurred 
in Mexico during the Carranza regime as related in the 
last chapter. The result of this contraction in railroad 
facilities was a stagnation of business in all regions 
affected. In agricultural districts there were low prices 
for food and high prices for everything else. In the 
mining districts the mine products, if they had been in 
demand at all in those districts, would have been very 
low, but the prices of all other commodities which had 
to be brought into the district by railroads were very 
high. As these other commodities included food, many 
people starved owing to an insufficient supply of food. 

Contraction of the medium of exchange has the same 
result. It implies an insufficiency of the medium to 
properly carry on the volume of business offered. A very 
serious result of such a condition will be described in 
the chapter on "National Efficiency" where the case of 
China will be discussed. 

Referring again to an illustration in the last chapter 
we saw that if the farmer could not get a loan, his pro- 
jected improvement could not be carried out. The refusal 
of the loan was an act contracting the medium of ex- 
change. Such acts tend towards business stagnation,, 
for if many are placed in the same position as the 
farmer, so that they are prevented from carrying out 
the business ventures they have contemplated, business 
will stagnate. 



50 THE STRANGLE HOLD 

Just such a condition happened in Mexico owing to 
lack of transportation facilities — stagnation of business. 
And it is found to happen always as a result of con- 
traction of the medium of exchange. 

The only way industry can be carried on is by means 
of the medium of exchange, so with every expansion of 
industry the demand for credit becomes greater and un- 
less its volume increases in the same proportion, busi- 
ness lags, industry hesitates and hard times and want 
follow as a result. 

An increase in the demand for credit raises its price, 
or in other words, the discount or interest rates go up, 
and they continue to go up until they get so high credit 
cannot be used profitably. Contraction then results, 
which, of course, stops business expansion. This condi- 
tion always means curtailment of production, resulting 
in curtailed employment and reduced wages. In this 
way any movement toward increased production results 
finally in the contraction of the medium by means of 
which business is carried on. 

Several reasons will be noted why, under private con- 
trol, the medium cannot expand to keep pace with the 
productive energy of all the people, so the final result of 
private control is that prosperity must invariably be 
followed by what we call "hard times." 

Expansion, or inflation, of the medium of transporta- 
tion and of the medium of exchange are the opposites 
of contraction, and the results of expansion in both cases 
are similarly analogous. 

If more transportation facilities are supplied to a com- 
munity than required, they will not all be used until the 



THE INDUSTRIAL STRAIT- JACKET 51 

community has had a chance to grow up to them. Mean- 
while^ however, such a condition would have the effect 
of lowering transportation rates, which would be a bid 
for greater production and greater consumption — that is 
— a better standard of living. 

The same is true of the medium of exchange. 

The community can use just so much credit, and if 
more is offered it will drive down interest rates; which 
in turn will invite increased business activity. 

Inflation, then, is in itself simply a bid for increased 
energy of production and increased comforts and hap- 
piness for the members of the community. 

These results are certainly not evil. But with our pres- 
ent system the indirect results of inflation are bad, for 
due to private control of bank credit, inflation is invari- 
ably followed by a period of deflation, or contraction. 

The sequence of the phenomena of inflation and defla- 
tion can easily be seen. 

Industry expands only by means of an expansion in 
the medium of exchange. When the medium expands, 
that is to say, is inflated, industry expands the more 
easily. But production soon outstrips the expansion of 
the medium and demands further expansion in propor- 
tion to the increased production. If this fails we have 
once more the sequence of increased demand for credit 
increasing the interest or discount rates until they are 
so high that credit cannot be profitably used, and so we 
come down again to a period of lowering prices and hard 
times. 

Under private control of the railroads we had the same 
result. 



52 THE STRANGLE HOLD 

Great demand for transportation service would raise 
the rates until the high rates would curtail shipment. 

The reason just referred to is a very potent one 
why, under the present system of private control of bank 
credit, there is always a tendency towards contraction — 
that is, there is always a tendency toward deflation or 
restriction of credit and hence against the expansion of 
industry. 

We saw the result of this in the very beginning of 
this book, in the case of the automobile dealers, who are 
now unable to obtain the credit necessary to carry on 
their business. 

The private control of the medium of exchange is a 
constant bid for credit restrictions which invariably 
brings on recurring periods of hard times, and until the 
medium of exchange is freed from private control, the 
dominating private interests will continue periodically 
to disrupt and oppress business through the curtailment 
of bank loans. 

It may seem to be a matter of no particular interest 
that a business man a thousand miles away cannot get 
a. loan from the bank, or that the bank will no longer dis- 
count the automobile dealers' paper. However, when a 
large number of such loans are refused, the effect on 
the private business man whose loan is refused is not the 
^nly effect. 

A merchant for instance fails to order goods because 
the banker will not grant him proper credit facilities for 
handling them; the manufacturer then curtails produc- 
tion because of the lack of orders; in consequence of 
which working-men are thrown out of employment. Hard 



THE INDUSTRIAL STRAIT-JACKET 53 

times for industry and business as a whole are the result. 

It is now quite clear that the grant or denial of a bank 
loan is not a private affair between the banker and the 
borrower, since the result directly affects all business 
activity and the prosperity of the whole community. For 
just so long as we allow the volume of the medium of 
exchange to be controlled by a few men we are not only 
permitting those men to dictate our individual success 
but to control all the wheels of industry. 

One reason, then, for the bad effect of private control 
over the medium of exchange is due to the fact that the 
banker invariably tends to cause contraction in the vol- 
ume of bank credit. This tendency springs from three 
separate causes. 

The first reason is that it is to the interest of those in 
control of the banks to contract the medium of exchange 
for, as we have seen, a contraction in the exchange me- 
dium relative to the volume of business results in a 
lowering of prices: for one dollar must now do more 
work than it did before. 

The creditor interests are the ones in control of the 
banks, and since their loans are expressed in terms of 
dollars, it is to their interest to make those dollars worth 
as much as possible to them. That is, they want the dol- 
lar to buy as much as possible — in other words, they 
desire low prices. 

If the price of wheat is one dollar a bushel, the cred- 
itor, who is in control of the bank, will get twice as much 
wheat for his money as he would if the price of wheat 
were two dollars a bushel. Therefore, it is to the bank- 
er's interest to curtail the medium of exchange, since such 



54 THE STRANGLE HOLD 

curtailment lowers prices of commodities and thereby in- 
creases the purchasing power of his dollars. 

Not alone does it accomplish that purpose but it in- 
creases the interest or discount rate he charges for their 
use, so those who control the banks not only increase 
their fortunes but their incomes at even a greater rate by 
a process which decreases business and increases debt. 

The present system causes producers and debtors to 
suffer while the non-producing creditors may fatten. 

The second reason for contraction is due to the bank- 
er's timidity, and his timidity is largely due to the fact 
that gold is at present the only commodity which is sup- 
posed to form a basis for the credit which is our medium 
of exchange. 

The banker, as we have seen, has to keep a reserve 
behind his deposits, and this reserve must either be in the 
form of gold or other money supposed to be redeem- 
able in gold. On this account the banker is interested in 
the country's gold supply, and consequently whenever 
gold is shipped out of the country in any considerable 
amount or prosperity makes a demand for the expansion 
of credit the banker gets into a state of panic and begins 
to refuse and to call loans. 

The irony of the situation is that every move he makes 
to escape an approaching imaginary financial storm 
hastens the approach of a real one and adds to its fury 
when it breaks. His fear of a possible panic produces 
genuine panic. 

Such panics occurred on an average of once every ten 
years during the eighty years preceding 1907, but in 
spite of their frequency they were not understood. 



THE INDUSTRIAL STRAIT-JACKET 55 

The banker, as we have seen, began to refuse and to 
call loans, fearing an impending calamity. This reduc- 
tion of loans meant a shrinking in the volume of the 
medium of exchange. As a result money became tight, 
trade decreased, prices fell, production diminished and 
the value of the security behind the still outstanding 
loans shrunk. In consequence of this condition the banker 
became still more afraid. 

He refused loans in the first place because of a be- 
lief that some change was going to take place in the 
financial world that would make it unwise for him to 
extend credit. He became still more afraid when he 
saw the result of his action and then he began to call 
more loans. This action caused still tighter money, 
greater stringency, and a further decline in prices, se- 
curities, and wages. 

Then there followed business failures, caused by the 
restriction of credit. Bank runs resulted, bringing in 
their train bank failures, and the commercial world was 
prostrated in a delirium of fear. All of which resulted 
from the banker being afraid of his own shadow. 

The Federal Reserve System now tends to protect the 
banks so that the financial panics that occurred every ten 
years up to 1907 seem to be overcome, but it does not 
protect the rest of the community from loss because of 
falling prices due to deflation nor does it remove the 
inevitability of periods of contraction, business stagna- 
tion, and industrial turmoil following prosperity. 

In the chapter devoted to the "Federal Reserve Sys- 
tem" an entirely new light will be thrown on that much 
misunderstood institution. Periods of depression will 



56 THE STRANGLE HOLD 

continue to follow periods of prosperity until their cause, 
the private control of bank credit, is removed. 

In former years after the decennial panic just de- 
scribed had finally exhausted itself, confidence would 
begin to return, and credit would slowly become read- 
justed. Soup kitchens would close, and those who had 
the courage and health to start life anew would get to 
work, and again deposit their savings with the banks. 

And then the banker, ignorant of the fact that he was 
the cause of the panic, would assert that it was the effect 
of tariff tinkering, politics interfering with big business, 
over production, overspeculation, or anything else he had 
a particular aversion for. And the public thought "Yes, 
I guess that was it," for the banker ought to know. 
While the fact was, as we have seen, that the banker was 
the unconscious cause of the whole trouble. 

A closer examination of the situation will disclose yet 
another fact, namely, that he just as unconsciously over- 
ruled the will of the people. 

For the purpose of analysis, we will take a cause which 
was formerly used as a scapegoat more often, perhaps, 
than any other — tariff changes due to change in national 
administration. 

This change in administration, could come about only 
by means of more votes being cast for low tariff prin- 
ciples than for high tariff; that is, more than fifty per 
cent of the voters of the country must have expressed a 
desire for such a change in the government policy. But 
when the change in tariff was made or threatened, 
the banker began to get pessimistic as to its effect on 
business. 



THE INDUSTRIAL STRAIT-JACKET 57 

He told his fears to customers applying for loans 
and advised them to wait a little to see how the change 
was going to affect them before they bought more goods 
or enlarged their business. 

Although a customer might disagree entirely with the 
banker as to the effect of the legislation, the important 
fact remained that the customer did not get his loan, 
because loans were, and still are, issued solely on the 
banker's judgment. 

A difference in opinion between the banker and more 
than fifty per cent of the voters of the country had thus 
denied to a responsible business man the right to use a 
needed amount of medium of exchange. He could not 
obtain the goods he intended to buy or increase his 
business. 

The wheels of commerce were stopped to such an ex- 
tent that this stoppage was reflected back through the 
whole complicated fabric of business. This condition 
forced other business men to curtail business and cancel 
orders, creating what economists now describe as a 
"Buyers' Strike." It required comparatively few set- 
backs like this to shock the commercial structure to its 
foundation. 

It should be carefully noted that his refusal of the use 
of the exchange medium was not the effect of the judg- 
ment of the banker, but the effect of his timidity. Thus 
it is seen that the banker's fear of impending disaster 
following a political change not only prevented the pro- 
posed or enacted tariff change from having a fair trial, 
but it falsely charged politics with causing panic or 
hard times. 



58 THE STRANGLE HOLD 

It could hardly be more certain that through control 
of the medium of exchange, the banker thus nulified 
the will of the people and refuted the claim that our 
government is one of the people by the people and for 
the people. 

Now we have seen two reasons why private control of 
bank credit will always tend toward contraction of the 
medium of exchange with its bad results. 

These reasons are, in the first place, the fact that it is 
to the banker's interest to curtail the medium of ex- 
change, thereby lowering prices and making the debts 
owing him the more valuable, as well as increasing his 
income by raising the interest rate. 

In the second place, on account of the banker's tim- 
idity, causing curtailment of loans as we have seen 
which caused business depression, and before the pass- 
ing of the Federal Reserve Act, also caused periodi- 
cally recurring financial panics. 

But there is still a third reason why our medium of ex- 
change, as it is constituted today, will invariably tend to 
contract when prosperity increases the demand for it and 
this reason hinges upon two circumstances. 

The one is the gold standard, by which gold forms 
the basis of our medium of exchange, coupled with the 
fact that the price of gold is fixed at $20.67 per fine 
ounce. That is, the amount of gold worth one dollar 
is fixed by law at 23.22 grains which amounts to the 
same thing. The second circumstance is the increas- 
ing difficulty in the production of gold. 

Gold is a commodity in all respects similar to any other 
commodity, with the exception that its price is fixed by 



THE INDUSTRIAL STRAIT-JACKET 59 

law. It has to be produced, by the process of mining, 
and it has a varying cost of production. 

As with every other commodity, when the cost of pro- 
duction increases, the price should also increase. Take 
coal, for instance. As mines become gradually exhausted, 
and the producers have to dig deeper and deeper, the 
cost of producing coal increases. Then, unless other 
sources of coal are found, where the coal is more easily 
and more cheaply obtainable, the price will increase. 

When the cost of producing gold increases, the same 
thing should happen — the price of gold should increase. 
But we see that the price of gold is set by law, which 
says that 23.22 grains shall be worth one dollar by 
saying that the dollar shall consist of that amount of 
pure gold. The law does not set the price of any other 
commodity, it does not say, for instance, how many dol- 
lars a pair of shoes are worth. But it does fix the price 
of gold. 

Now bank reserve requirements make a reserve of gold 
behind paper money and, therefore, of deposits neces- 
sary. The banker must keep his reserve either in money, 
or in credit supposed to be redeemable in gold. Con- 
sequently, the amount of gold held restricts the amount 
of the medium of exchange that can be issued. 

As industry expands, the medium of exchange should 
expand, or we will have contraction, with its evil con- 
sequences. But the expansion of the medium of ex- 
change is limited by the amount of gold and gold is 
limited by production. 

The cost of gold increases with the cost of mining 
and milling. 



60 THE STRANGLE HOLD 

Consequently if prosperity raises the price of labor 
and the commodities entering into gold production then 
production will decrease because the price of gold is 
fixed by law and cannot increase with the cost of pro- 
duction. 

Here once more we see an inevitable tendency towards 
contraction. 

But there is a paradox here, too, which shows that 
not only because the price of gold is fixed, but also 
because gold alone is used as the basis for our medium 
of exchange, we have this tendency toward contraction. 

Expansion of industry under our present financial sys- 
tem invariably means a period of rising prices. Ex- 
pressed in gold, it means a fall in the price of gold. 
And we have seen that in order to increase the volume 
of the medium of exchange so as to keep pace with in- 
creased business it was necessary to increase the amount 
of gold produced. 

As with other commodities, this can be done only by 
increasing the price of gold as its cost of production in- 
creases. Unless the price increase keeps pace with the 
cost increase gold production decreases and thus com- 
pells contraction which strangles business. 

Could anything be more absurd than a system which 
causes prosperity to check prosperity? 

Such a system is on a par with the building of an auto- 
mobile and putting the reverse gear where the high speed 
should be. Every time the gears are thrown into high 
the machine backs up. 

Even the slightest acquaintance with machinery must 
show that such an arrangement would throw a very 



THE INDUSTRIAL STRAIT-JACKET 61 

great strain on the whole mechanism and but little re- 
flection is required to show that our financial system is 
so arranged that it is an automatic reverse on our indus- 
trial and business activities. Consequently the whole so- 
cial system is shocked instead of benefited by a wave of 
prosperity. The bad effect which such an arrangement 
has on the system is shown in industrial turmoil and 
social unrest. 

It begins to be clear that there is something radically 
wrong with the gold standard. Further consideration 
in the chapter on "The Gold Standard" will strengthen 
this conclusion. 

We have seen that the control of the medium of ex- 
change is in the hands of the banks and banks are largely 
controlled by the "vested interests/' or non-producing 
creditors to whose advantage it is that prices shall fall. 
For this reason the result of private control is always a 
tendency toward contraction of the medium of exchange. 
And we have also seen that the gold standard aids in 
that tendency. 

We must conclude then that the gold standard is the 
ally of the vested interests, since its tendency is in the 
direction most profitable to those interests. 

The gold standard and the "vested interests" are but 
phases of the fault that is at the bottom of our trouble. 
Private control of the medium of exchange is the real 
fault. Basing our medium of exchange upon one com- 
modity, gold, makes the private control of bank credit 
still more effective, in as much as the bankers are en- 
abled to gain control also of the gold. And so long as 
our medium of exchange is controlled by a gold 1 oserve 



62 THE STRANGLE HOLD 

and is in the hands of private interests, prices and 
wages must come down and debts go up whenever the 
gold production falls off. It is an automatic break on 
national efficiency and personal prosperity. 

Although this defect is but another phase of the gen- 
eral fault, and serves only to intensify the evil effects of 
private control, it is, nevertheless worthy of special study. 
The gold standard idea, through a fallacy, is deep rooted 
and while of no consequence in our remedy it should be 
understood just because it is fallacious. 

The next step, therefore, will be to study the gold 
standard, not exhaustively, but only to see how it arose, 
and to note some of its present deficiencies, and also to 
understand how it adds to the evils of private control of 
our real medium of exchange — bank credit. 



CHAPTER V 
"FROZEN CREDITS" 

IN TRACING the development of our present medium 
of exchange, we saw how, for purposes of greater 
convenience, one or two commodities came to be used 
almost exclusively. Gold and silver had the advantages 
of possessing great value in small bulk; they were, 
therefore, convenient to carry. Their scarcity also gave 
them a more or less steady value, and so they came to be 
selected instead of other commodities as the medium to 
be used in changing the ownership of goods. 

Gold possesses, even to a greater extent than silver, 
the qualities enumerated above and so naturally became 
the more important medium, or money, while silver to a 
great extend lost this dignity. 

Both of these steps were part of a natural develop- 
ment and each was an improvement over the former. By 
the use of something with a fairly definite value as a 
medium, a much greater amount of trading and commerce 
could be carried on than under the cumbrous form of 
direct barter, or by the use of a medium of uncertain 
value. But a time came when even this improved method 
of transacting business became inadequate for the needs 
of commerce. 

The amount of the commodity was limited. Gold does 
not increase as population increases or as business activ- 
ity increases, but only through the discovery of new 
sources or of better methods of production. 

63 



64 THE STRANGLE HOLD 

Consequently, since its use was necessary in order to 
effectuate the exchange of goods and services, just as 
rolling-stock is necessary for transportation, increased 
business called for more gold. This increased demand 
for gold as a medium for carrying on business resulted 
in the community bidding higher for its use. 

Thus, a man who had one thousand bushels of wheat 
which he wanted to trade for improvements, clothing, etc., 
would offer more and more wheat for the use of the 
medium of exchange according to its scarcity and accord- 
ing to how pressing were his demands for the things he 
wanted or the debts he had to pay. 

In other words, if the supply of gold were not in- 
creased to meet the needs of an increased volume of 
business, prices would keep going down until business 
stagnated and production fell off to such an extent that 
the community suffered. 

As industry increased, then, a greater amount of the 
medium of exchange became necessary. The supply of 
gold did not increase with sufficient rapidity to supply 
this need, and so some other medium had to be used in 
addition to gold. Credit arose to meet this necessity, and 
credit has since then grown and expanded until today 
it forms almost the entire amount of our medium of ex- 
change. 

This use of credit was a natural development, and as 
in the case of those mediums that preceded it, one 
that was an improvement over former conditions. Per- 
haps for the reason that it was a natural step it did not 
take the form that would have been most suitable. At 
any rate from the defects already mentioned it would 



"FROZEN CREDITS" 65 

seem that once more we have come to such a stage in 
industrial progress that a further improvement is nec- 
essary. 

This does not mean that something other than credit 
is required to serve as a medium of exchange. Nor does 
it mean that we must discard gold. What is necessary is 
to put credit on a broader basis. Increase its carrying 
capacity just as we increased the carrying capacity of 
our railroads to keep pace with our idustrial develop- 
ment. Reorganize it, bringing out its immense possibil- 
ities. Once this has been done, it will become an adequate 
instrument of exchange. One so perfect, in fact, that it 
will satisfy all the demands of trade and industry. 

In order to broaden the basis of our credit and accom- 
plish the desired result, it will merely be necessary to put 
bank credit upon a basis of truth. Its evolution shows 
it developed upon a false basis and it still rests on a 
promise of gold redemption which we all know cannot 
be fulfilled. Let us see what this statement means. 

We have seen that the earliest development of credit 
or rather bank credit, as we use it, was in the hands of 
the goldsmiths. It started when they made a practice of 
accepting deposits of gold and silver and giving receipts 
therefore. These receipts, on account of their ready con- 
vertibility into gold, became negotiable. In other words, 
these notes or receipts began to circulate as money, be- 
cause of the goldsmith's reputation for reliability in pay- 
ing gold on demand for his notes. 

As a result of this reputation, the goldsmith found 
that the people, for reasons of convenience, would rather 
have his notes than metal money. 



66 THE STRANGLE HOLD 

Soon he accumulated a great store of the precious 
metals that was seldom called for. The better his reputa- 
tion for prompt payment, the less frequently he was 
asked to pay. So he began deliberately to trade on this 
public confidence, and sell his credit for use as money. 

As long as he could retain the confidence of the people 
by always paying on demand, there was no limit to the 
receipts that he might issue. 

Thus we see the development of a practice which con- 
tinues today and which causes the basic defect in our 
present financial system. The goldsmith's deception is 
still continued by our banking system and it will soon 
be shown how it causes our trouble. 

The goldsmith issued credit, pretending it was backed 
up by gold. He gave a receipt for gold which had not 
been deposited. 

Although, on account of the necessity for some im- 
provement, the growth of credit in this way did some 
good, nevertheless the fact that it is founded upon decep- 
tion has hampered it and kept it from functioning as 
perfectly as it will when put upon a foundation of truth. 

Banknotes and government paper money form one 
part of our credit today. They are promises to pay in 
gold. Yet, as will be shown subsequently, it would be 
physically impossible to fulfill this promise, for the 
simple reason that there is not enough gold obtainable 
to do so. This form of credit is, therefore, based upon a 
fallacy. 

Similarly with bank credit. The fallacy in this case 
takes a somewhat different form, but in effect it is the 
same. The depositor thinks that he is handing money 



"FROZEN CREDITS" 67^ 

to the banker which will be kept for him. The borrower 
thinks he is borrowing money from the bank. Both of 
these ideas are incorrect. 

When a customer deposits money with a bank, the 
banker does not become a trustee for this money, prom- 
ising to take care of it for the customer. The money 
deposited becomes the property of the bank, in exchange 
for which the bank gives its promise to pay back that 
amount on demand. 

As we have seen in a previous chapter, the banker uses 
this money just as the goldsmith did. He holds it and 
uses it to pay whenever he is called upon to pay. As 
long as he can pay when demand is made his promise 
to pay is good so he trades his promise to pay to those 
who want to borrow in return for their promise to pay 
him. 

It has been shown that these bank "loans" are made by 
giving the borrower credit for a "deposit." The borrower 
has made no deposit but has simply traded his promises 
to pay in the shape of a promissory note for the bank- 
ers promise to pay in the shape of a credit on the bank's 
books. 

The very fact that when the banker makes a loan he 
gives the borrower credit for a deposit the same as he 
gives the depositor credit shows that the banker is not 
a trustee for money deposited but is a debtor of the 
depositor. 

Like everyone else he will pay when he can and the 
system is framed for the purpose of making the cus- 
tomer think that he can always pay. 

The object of the Federal Reserve System, explained 



68 THE STRANGLE HOLD 

later, is to increase credit by increasing public confidence 
in the banks. Its purpose is to keep the customer 
believing the banker can pay. By so doing the system 
prevents too many customers from demanding payment 
at the same time and so prevents bank runs and panics. 

Just as in former times people accepted the gold- 
smith's receipts as money because they thought that there 
was an equivalent amount of gold behind them, so today 
people accept banknotes and other bank credits because 
they think that they can get money or gold in exchange 
for them if they so desire. ' 

Now it is true that during normal times, when there is 
little demand for gold, it is possible to get both bank 
credit and paper money redeemed in gold. But in ab- 
normal times and whenever there has been really a de- 
mand for money, when people most urgently need gold, 
then they could not get it. And the reason why they 
were presented from having their notes and checks re- 
deemed in gold was because there was not enough gold 
to supply the demand. 

The promise to redeem in gold still continues while 
fulfillment of the promise has become more and more im- 
possible until now it is little less than a joke. The extent 
to which this joke has been carried by a complicated 
reserve system will be pointed out later. The fact that 
there is not enough gold to fulfill the promises to pay 
in gold is so well known to every one that were it not 
that the human race has worshiped this false god 
gold for so many generations the mere statement that 
the promise is false would be sufficient. But the promise 
still persists and what is more strange it is accepted in 



"FROZEN CREDITS" 69 

spite of the many, many times that it has been proved 
to be false. We still give it credence and use it as the 
basis of our financial system. 

Figures serve only to confuse and there are more 
potent proofs than the mere recital of figures that the 
gold redemption promise is false. Conclusive proof is 
based upon what everybody knows to be true — many, 
indeed, from bitter experience. This proof is the evi- 
dence afforded by the panics that have so often occurred, 
during which payment in gold was demanded but refused. 

Other evidence of the fallacy of the gold standard is 
found in every issue of clearing house loan certificates 
that has been made. 

Clearing house loan certificates were first issued 
in 1860, owing to a demand on the banks for money. 
Subsequent issues occurred in 1861, 1863, 1864, 1873, 
and in 1893. In recent years there have been wide ex- 
tensions of their use. 

In 1907 industry had outgrown the currency system, 
and to supply the need, over one hundred millions of cer- 
tificates were issued against four hundred and fifty mil- 
lions of collateral. These were in public circulation from 
October, 1907, to January, 1908. In 1914 over two hun- 
dred millions of dollars in clearing house certificates 
were issued, and got into public circulation, in addition 
to other emergency money issued by the National Cur- 
rency Association. 

We will discuss here the issues that got into circula- 
tion, because they afford the most complete proof that 
the gold standard, with its promise to redeem credit in 
gold, is fallacious. 



70 THE STRANGLE HOLD 

Erom the Comptroller's Report for 1919 we learn that 
bank deposits in the United States amounted to about 
thirty-three billions of dollars, while the reserve held 
against them was just a trifle over one billion dollars. 
That is, in the richest country in the world, the banks, in- 
cluding the Federal Reserve, has less than three dollars 
for every hundred they promise to pay. This reserve 
is sufficient to take care of the demand for payments in 
money in normal times, but when an abnormal demand 
comes, it is found inadequate. 

Similar conditions existed in 1907. Business failures 
and other causes had precipitated a panic, which became 
general. The result was an abnormally large demand 
for money from the banks — depositors clamored to with- 
draw their deposits. And there were only about two or 
three dollars in the country to pay each hundred dollars 
the banks had promised to pay. 

There was only one way out of the difficulty, and the 
banks took it. They put their credit in tangible form, 
and in such shape that it looked like money. They issued 
clearing house certificates, in appearance similar to 
government issued paper money, and the public accepted 
it. 

In fact they had to accept it. There was no other 
alternative, for legal relief was impossible. State gov- 
ernors declared every day a legal holiday until the scare 
was over. As the courts are closed on holidays and as 
no one could bring an action against a bank the certifi- 
cates had to be accepted. 

Several inferences are possible from these issues of 
clearing house certificates. 



"FROZEN CREDITS" 71 

In the first place their issuance was positive proof 
that the reserve system is founded upon fallacy. Their 
issuance also demonstrated the immense power of the 
banking interests. But for the moment we will set these 
matters aside, to come back to them later, after showing 
how the events above related prove the fallacy of the 
gold standard. 

Under the gold standard, all credit is supposed to be 
a promise to pay in gold. A check or draft is looked 
upon as an order for real money which is supposed to 
be held by the bank in trust for the depositor. The 
words on the check make it an order for money. But the 
money is not there. While there is sufficient money held 
in reserve to take care of the normal demand for money, 
the moment the demand becomes abnormal, the system 
breaks down. 

When the abnormal demand of the panic of 1907 oc- 
curred, the banks could not fulfill their obligations, for 
the money to do so did not exist. To get out of the dif- 
ficulty, they presented their credit in a different form, 
and forced the people to accept this new form of credit 
as money, at its face value. 

While the public was fooled or forced into accepting 
the certificates it is obvious, among other things, that 
the very act of issuing them proved that banks were un- 
able to carry out their promises. The obligation of the 
gold standard, to pay in gold was clearly proved to be 
impossible of fulfillment. 

In fact the greatest concern of our financiers today is : 
"How can we juggle this promise of gold redemption 
around so as to keep the people believing in it?" It is 



72 THE STRANGLE HOLD 

the same old question that bothered the banker's pre- 
decessor, the goldsmith. In the chapter on "The Gold 
Standard" it will be proved by the words of a former 
Secretary of the Treasury that this question is the bank- 
er's principal study. 

Were the matter not so serious it would be a joke and 
there is also a bit of comedy behind the clearing house 
certificate which savors of the slapstick. 

Panic occurred because the public lost faith in 
bank credit. Perhaps someone realized that the banks 
were not able to fulfill their promise to pay in gold. For 
they had in all kinds of money only about three dollars 
with which to pay a hundred, and so some one became 
nervous. But our financiers were equal to the occasion. 
They got together in their clearing house and dished 
up the same credit in a little different form and the 
public swallowed it. 

No pomp or show of power in this — just a little sleight 
of hand. Our prince of leger-de-main, the banker, issued 
bank credit as money in defiance of the law of the land 
and in the face of public distrust, and the people came 
away satisfied. 

The people were hoodwinked, the infraction of the 
law was permitted to pass unnoticed, and its soothing 
effect was mistaken for a real cure ; so the same principle 
was used in the Emergency Currency Act of May thir- 
tieth, 1908, and was later formulated into law by the 
Federal Reserve Act. Both acts are attempts to escape 
the consequences of a promise that cannot be fulfilled. 

Could anything demonstrate more conclusively the 
weakness and fallacy of our financial system? 



"Fft02EN CREDITS" 73 

The gold standard which promises that all credit 
shall be redeemed in gold is a falsehood, consequently 
our whole system is false, for it is based on this prom- 
ise. There is not enough gold in existence to redeem even 
a small fraction of the outstanding credit. Whenever it 
becomes necessary to fulfill the promise of gold redemp- 
tion, that promise cannot be fulfilled, and it is necessary 
to resort to tricks and subterfuge. 

Now let us turn to this other phase of the same prob- 
lem, and look into the fallacy of the reserve system. 

To cash depositors and to borrowers alike the banker 
extends his credit, in the form of a promise to pay 
money, either on demand, or subject to certain condi- 
tions, such as notice before withdrawal. 

In order to gain public confidence and in a measure to 
safeguard the interests of the depositor, the law re- 
quires the bank to keep a certain proportion of its 
deposits in reserve. In some countries the proportion 
required is left entirely to the discretion of the banker, 
but in this country it is fixed by law both for national 
and for most state banks. 

The actual proportion required depends upon whether 
the bank is a state or national bank, and upon whether 
the deposit is a time or demand deposit — a savings 
account, or a commercial account. Commercial deposits 
may be withdrawn at any time, but notice of intention 
to withdraw must be given some days ahead in the case 
of a savings account. Most banks, indeed, will pay even 
savings accounts on demand, if times are normal, and 
provided the depositor is willing to forego his interest. 

The above, in brief, are the factors that control the 



74 THE STRANGLE HOLD 

proportion of deposits required to be held in reserve. A 
member of the Federal Reserve System is required to 
keep in reserve from seven to thirteen per cent of its 
demand deposits, according to its location, and three per 
cent of its time deposits. These reserves must be depos- 
ited with the Federal Reserve Bank of the district which 
in turn must keep thirty-five per cent of these deposits 
(which are reserves themselves), in reserve. 

Now this system is workable only so long as times are 
normal, and there is no great demand for cash — in other 
words, so long as industry and commerce are in such a 
condition of confidence that bank credit is accepted with- 
out hesitation. But where an average of about ten per 
cent is all that is kept in reserve by primary banks, 
and where the Federal Reserve Bank only keeps about 
one-third of this in reserve, so that in fact only about 
three to four per cent of demand deposits are kept in the 
form of a cash reserve, then it is obvious that the moment 
a demand for payment of deposits that is only slightly 
greater than normal occurs, the whole system breaks 
down. 

To cover up the gold redemption lie and to furnish, 
as the Federal Reserve Act says an "elastic currency," 
that act provides that the thirty-five percent the Federal 
Reserve Banks must retain as reserve against deposits 
may be carried in gold or "lawful money/* Greenbacks 
are "lawful money" and it will be shown in a later chap- 
ter that the banks may issue about ten billion dollars of 
credit with no reserve behind it except greenbacks. 

In addition the Federal Reserve Act provides that all 
reserve requirements may be suspended by the Federal 



"FROZEN CREDITS" 75 

Reserve Board at any time and this provision puts the 
country on an unlimited paper money or bank credit 
basis. 

If the financiers who framed the Federal Reserve Sys- 
tem believed that the promise to redeem in gold could be 
fulfilled why did they provide these means of avoid- 
ing fulfillment? 

They knew, as all thinking men know, that the gold 
standard promise is nothing but an ancient fetish and 
so in reality they have discarded it. 

However, instead of establishing a better system based 
on truth they still try to cover up the basic falsehood of 
the gold standard by a complicated system of reserves. 

This bit of jugglery has so far accomplished the pur- 
pose of deception, but greatly to the detriment of all con- 
cerned, as is evidenced by our present slump in business 
the exact cause for which will soon appear. 

The issuance of clearing house certificates, affords 
proof that the gold reserve is a fiction. Every panic, 
in fact, was abundant testimony. When banks had to 
close their doors, when legal holidays were declared to 
relieve them from payment, when a thousand and one 
other subterfuges have had to be employed to escape from 
the promise of gold redemption is it not marvelous that 
the foolish promise still continues to be the basis of our 
credit system? 

It was formerly the custom of the English Banks, 
when a run was being made upon them by frightened 
depositors, to pay in sixpences. The long time required 
to pay any considerable sum in this shape gave them lee- 
way, and a chance to tide over the critical period until 



76 THE STRANGLE HOLD 

the panic was over. Such a custom is merely illustra- 
tive of many other devices that have been used and al- 
ways will have to be employed as long as the false idea 
of a reserve system is maintained. 

It is hardly necessary to proceed further in this as the 
falsity of the system of cash reserves behind deposits is 
sufficiently clear. Let us now sum up the points we have 
offered, and proceed further in our search for the cause 
of our present troubles. 

It has been shown, in the first place, that credit, as it 
exists today, is founded upon a fallacy. The problem 
was divided into two phases, and the fallacy in each 
case has been demonstrated. There is no alternative but 
to accept the truth that our present credit system, and, 
consequently, our banking system, which controls our 
credit, is founded upon a lie. It is no "white" lie either, 
for it causes any amount of trouble. 

In order to emphasize this fact let us digress for a 
moment, and see what are some of the results of this 
fallacious system. 

In the early part of this book an example was given 
of how the bankers refused to extend credit for an enter- 
prise which would have benefited society and which was, 
therefore, deserving of credit. And from this fact we 
reasoned that the banker, by obstructing the fullest prog- 
ress of industry, had acted against the best interests of 
society. 

At the same time it was hinted that this might per- 
haps not be the banker's fault. 

Let us now take the case of a banker who has ex- 
tended his loans to such a degree that his cash on hand 



"FROZEN CREDITS" 77 

and his credit with the Federal Reserve are only suf- 
ficient to cover the reserves required to be held against 
deposits. 

Then, although the project above mentioned were de- 
serving of credit, and although good security were offered 
and the banker wanted to make the loan he could not 
grant it, for he would not have any cash to hold or 
funds to deposit with the Federal Reserve Bank as a 
reserve against the deposit that the loan would create. 

In other words the bank has arrived at its limit. It 
has let out all the credit that the reserve requirement will 
permit. 

For instance take the little bank we started business 
with at the beginning of this book. It had in cash from 
the sale of its stock and from deposits $60,000, and it 
was required to keep a 10% reserve which means that 
it had to have 10% of its deposits in cash or on deposit 
with the Federal Reserve. So this little bank could have 
$600,000 in deposits. As was shown all but $50,000 of 
these deposits or $550,000 was created by the bank mak- 
ing loans. Now, when a bank arrives at this point, unless 
it gets in more cash or paper that it can deposit with the 
Federal Reserve, it can make no more loans without ex- 
ceeding its reserve limit. When a bank's business reaches 
this state it must refuse to make loans. Its credit is no 
longer "liquid" — it has arrived at the zero point where 
bank credit "freezes." 

Although we hear much of "Frozen Credits" today the 
objection may still be made that we are here taking an 
extreme case, and one that does not often exist. The 
answer to this, if any be required, is that the banker's 



78 THE STRANGLE HOLD 

fear of going too near the margin of his reserves, has a 
similar effect, so that even in cases which are not so ex- 
treme, there is the tendency to refuse loans where loans 
should, in the interests of industrial progress, be ex- 
tended. Consequently, there is the tendency to hamper 
progress. 

The extreme case is selected for illustration, because 
it shows the matter in the clearest manner, but the 
tendency is there and has a very strong influence whether 
the case is an extreme one or not. 

It becomes clear then that credit "freezes" because 
it is based on gold and that "frozen credits" which are 
the cause of our present business slump are in reality 
"guilded credits." That is the gold redemption promise 
is the element that causes bank credit to freeze. 

Now it is also clear that credit is necessary to trade 
and since trade creates industry, as credit freezes, so in- 
dustry slows down. This condition makes our present 
system very awkward, for since prosperity increases the 
demand for credit, the more prosperous business becomes 
the quicker bank credit freezes for the sooner it arrives 
at the zero point set by the reserve. 

So, as long as we continue a financial system where 
credit is based on reserves, prosperity will always check 
prosperity. 

It is akin to the automobile previously referred to with 
the reverse gear where the high speed should be. If 
you can imagine yourself trying to operate or even ride 
in such a machine you will have a mental picture of our 
present social system and will understand the cause of 
its worries and disappointments. As soon as business 



"FROZEN CREDITS" 79 

speeds up a little the "reverse gear," that is the reserve 
requirement, gets in its work and back we go. 

Succeeding chapters will show how this "reverse 
gear" may be removed or in other words how to do away 
with the false promise of gold redemption which causes 
bank credit to "freeze." When we perform the slight 
operation suggested prosperity will return and it will be 
continuous* 

Now in addition to showing clearly one of the harm- 
ful effects of a false system of credit, the foregoing il- 
lustration gives a hint at the fault that lies behind all 
the other faults, and which must be taken into account 
before a remedy can be devised that will really be a 
remedy. 

Briefly, the banker could not, in the above case, ex- 
tend the loan, because, although the security offered was 
good, it was not a liquid security or a form of security 
required for rediscount at the Federal Reserve. 

In the development of commerce from barter to ex- 
change by means of money, a few commodities, and 
finally only one commodity, came to be chosen as the 
medium of exchange. 

In the development of exchange by means of credit, 
the superiority of this one commodity — gold — was not 
assailed. 

But commerce has now outgrown credit based on one 
commodity, and requires a system of credit based on all 
commodities of value and one which will always have 
a full measure of public confidence. 

But before we discuss the remedy, we must see clearly 
what must be remedied. We will continue, therefore, 



80 THE STRANGLE HOLD 

with our inquiry into the defects of our present system 
of exchange. 

In discussing the issue of clearing house certificates, 
we stated that those issues which got into public circula- 
tion afforded a powerful instance of the immense power 
of the banking interests. 

In issuing these certificates, and allowing them to get 
into public circulation, these interests committed an in- 
fraction of the law, and escaped unpunished. 

The Constitution reserves the right — "to coin money" 
— to the Federal Government. Money is the medium of 
exchange, and clearing house certificates became part 
of the medium of exchange while they were in public 
circulation. There was no legal sanction to the issuing 
of those certificates, and in issuing them, therefore, the 
clearing houses, and through them the bankers, infringed 
the law. 

Now there is no doubt that the expedient of issuing 
those certificates prevented further disaster, but this 
does not lessen the fact that it was an infraction of the 
law. And it is perfectly obvious that no lesser power than 
the banking interests would have been permitted to 
justify an infraction of the law by the plea of expe- 
diency. 

That they were allowed to do so, therefore, and escaped 
unpunished, indicates the extent of their power. 

We have had many evidences of the existence of a hid- 
den power which is superior to government authority, but 
probably no occurrence has ever pointed out more dis- 
tinctly the extent of this power, and at the same time the 
exact source from which it springs. 



"FROZEN CREDITS" 81 

And furthermore, the plea of expediency is in itself 
an indictment of the system which makes such an expe- 
dient necessary. For the plea of expediency implies 
that the method resorted to was illegal. 

Would anyone be disposed to deny that a system which 
requires the use of an illegal expedient to avoid the harm- 
ful results of its inadequacy is a faulty system, and 
therefore one which should be revised? 

Here we have at one time an illustration showing 
that our medium of exchange is entirely inadequate to 
perform the service required of it, and also a glimpse of 
the tremendous power the group which controls it has 
acquired. 

These, then, are the faults of our present medium of 
exchange. 

Primarily, it is in the control of private interests, who 
can determine its amount, and whose control inevitably 
tends toward a restriction in volume, so that industry is 
continually hampered and every period of prosperity is 
invariably followed by a period of contraction in the 
medium of exchange resulting in depression of business. 

Secondly, the medium of exchange, as it exists today, 
rests upon a false foundation, one that is too narrow, one 
which, although usable during the earlier stages of the 
development of bank credit, has become outgrown, 
and, lastly, one which contributes to the destructiveness 
of the private control of bank credit. 

This foundation is the gold standard, under which all 
credit is based upon gold, and the medium of exchange 
is supported by a gold reserve rather than by sound 
credit based on real value. 



82 THE STRANGLE HOLD 

The whole purpose of this discussion has been to 
point a way to a remedy. 

Now that we see clearly where the present system falls 
short, and where it is necessary to apply correction, we 
can understand what features the remedy must possess, 
in order to satisfy the present demands of commerce. 

We are consequently now ready to proceed in our 
search for an improvement which will do away with these 
shortcomings in our financial system and which will 
not only restore the country to a condition of prosperity 
but which will permit prosperity to continue. 

But there is another point that we must bear in mind, 
and that is to make the remedy practical. We must take 
things as they are today, and devise a means which, 
while effectual in abolishing the trouble, does not necessi- 
tate such wide-sweeping changes as to be practically im- 
possible of application. 

We cannot reach far without standing on the shoulders 
of our predecessors, and we, therefore, should seek to 
preserve the good qualities of the present order, while 
modifying it only so far as is necessary to eradicate the 
shortcomings. In this way only can a practical and per- 
manent change for the better be hoped for. 

With this in mind, our next step is to inquire more 
closely into what might be called the philosophy of 
money — to see exactly what the nature of our medium 
of exchange is, what place it should fill, and what its 
functions should be. Then we may proceed to our in- 
quiry as to what actual measures must be taken to modify 
the present system in such a way that our exchange 
medium will fulfill its proper functions. 



"FROZEN CREDITS" 83 

Then the next step after that, the last step, will be to 
suggest the actual means by which these measures can 
be practically applied to our present system and finally 
we must show that they accomplish the desired result. 



CHAPTER VI 
A PERFECT EXCHANGE SYSTEM 

IN ORDER to determine what sort of medium of ex- 
change would best be suited to existing conditions of 
modern industry and commerce, the first step is to gain 
a definite idea of the proper functions of a medium of 
exchange. 

For this purpose let us first of all make a distinction 
which, while somewhat arbitrary, may help us to obtain 
a better understanding of the subject; that is the dis- 
tinction between money and the medium of exchange. 

Money is a measure of value, while the medium of 
exchange is the means used to transfer the ownership of 
goods and to compensate services. 

In order to make this distinction clear, let us compare 
the conceptions of value and length. Both value and 
length express a ratio between different objects. We 
say, this is longer or shorter than that, and, this is more 
or less valuable than that. And in order the more easily 
to compare the length of different objects, an arbitrary 
table of standards has been fixed. A certain absolute 
length is called a foot. One-twelfth of this length is an 
inch. A length equal to three feet is a yard. 

A similar table of standards is made as regards value. 
In the United States this money table for measuring 
value is as follows: 

84 



A PERFECT EXCHANGE SYSTEM 85 

Ten mills make one cent. 
Ten cents make one dime. 
Ten dimes make one dollar. 

And just as a certain definite length was arbitrarily- 
set and called a foot, so was it also intended that a cer- 
tain arbitrary amount of value should be called a dollar. 

In itself, then, money is not value, but the measure of 
the exchangeable ratios between various goods and serv- 
ices — that is, money is the measure of value. 

What the foot is to the measure of length, the dollar 
is to the measure of value. The foot is that unit in which 
we express length and the dollar is the unit in which we 
express value or price. 

In order, therefore, to determine what are the qual- 
ities essentially required in an ideal medium of exchange, 
it is necessary first to determine exactly what are the 
functions of money. Having determined this, it is then 
possible to proceed and determine what qualities a 
medium of exchange should have in order to fulfill those 
functions in an adequate manner. 

The object of transportation is to add value to goods 
by changing their location; the railroads are one of the 
most important factors in carrying out this object. Sim- 
ilarly, the object of money is to add value to goods by 
facilitating a change in their ownership, so that they 
will be owned by someone to whom they are worth more; 
this object is carried out by means of the medium of ex- 
change. 

Just as the ideal transportation medium is the medium 
which will change the location of goods, whenever neces- 



86 THE STRANGLE HOLD 

sary, with the least possible effort and trouble, so the 
ideal medium of exchange is the medium which will 
change the ownership in goods with the least possible 
friction, trouble, and loss, and whenever necessary. 

The medium of exchange, then, is not an end in itself, 
but only a means to an end. It is a means by which 
people may exchange what they have for something 
which they are more desirous of having. 

This exchange could be made directly, by means of 
bartering one goods for another, but at best barter is a 
very cumbersome and unsatisfactory method. Exchange 
carried on by barter is practiced only in the early stages 
of civilization. Even the smallest advancement in civil- 
ization requires some sort of a medium of exchange in 
order to carry on trade. 

People, therefore, are interested in getting money for 
what they have only in order that they may get what 
they want at some future time in exchange for what- 
ever they accept as money. 

Immediately we see one essential requirement of any 
medium of exchange, acceptability. People will not give 
up their goods for a medium unless they are sure that in 
turn they can get in exchange for that medium what they 
want. They must feel sure that other people will accept 
from them the medium of exchange in return for the 
goods they have to sell. 

"Safety First" or confidence then in the medium of 
exchange is the first necessary requisite. 

Furthermore, people are interested not only in getting 
something in exchange for what they give up — they are 
interested also in getting an equal amount of value and 



A PERFECT EXCHANGE SYSTEM 87 

having what they get retain its value. Here we have 
the element of time. 

Some time must elapse from the moment when a per- 
son gives up the goods he possesses — or the services he 
renders, his labor — in exchange for a quantity of the 
medium of exchange, and the moment that he uses it, or 
a part of it, to purchase the goods he desires. This time 
may be longer or shorter, but irrespective of its length, 
it is essential that the medium of exchange shall not 
shrink in value while it is in his hands. 

The reverse is also essential — the medium of exchange 
must not swell in value. For while this would benefit the 
person who possesses a quantity of the medium of ex- 
change, it would work just as great an amount of harm 
to some other person who is not holding the medium of 
exchange, and who finds it more difficult to obtain the 
same in exchange for his goods. 

These then are the two essentials of the ideal medium 
of exchange. The people must have absolute confidence 
in it, so that it will be accepted by everybody without 
question. This condition prevails only when everybody 
feels quite sure that he will be able to get what he de- 
sires in exchange for it. 

And secondly, it must have an absolutely stable value. 
The dollar must not grow larger or smaller. 

Think of what would happen if the standard of other 
measures should fluctuate. 

Suppose the yardstick were shortened one inch. Then 
the creditor who had due him ten yards of cloth would 
lose ten inches. And on the other hand, if the yard stick 
were lengthened one inch, the creditor would gain ten 



88 THE STRANGLE HOLD 

inches this time, but the debtor, the man who had to hand 
over ten yards of cloth, would have to hand over a 
length equal to ten inches longer than he had bargained 
to hand over. The debtor in this case would lose ten 
inches of cloth, or an amount of value corresponding to 
the value of ten inches of cloth. Think of the havoc and 
confusion such an occurrence would give rise to. 

And this is precisely what does happen to the meas- 
ure of value. 

Commercially, value is price. The exchangeable value 
of anything is its price. If we shorten the value meas- 
ure prices go up for it takes less goods to equal a certain 
sum and if we lengthen the value measure it will take 
more goods so prices will go down. An example will 
make this clear. 

In the early days of colonial Virginia the colonists, 
for want of coins of precious metals, used tobacco as a 
medium of exchange. When the tobacco crop was large, 
the volume of the medium of exchange became inflated, 
and it took more tobacco to buy a bolt of cloth, a keg of 
rum or a sack of potatoes than it did when the crop was 
normal. In other words, a heavy crop of tobacco meant 
that prices would be high. This favored the debtor for 
it shortened the measure of value and thereby reduced 
the amount of goods or services he must render to pay 
his debts just as the shortening of the yard stick would 
reduce the amount of cloth the seller would give for a 
yard. 

Conversely, when the tobacco crop was small, the 
volume of the medium of exchange contracted, and the 
same articles could be bought with less tobacco. A bad 



A PERFECT EXCHANGE SYSTEM 89 

crop of tobacco meant low prices or the lengthening of 
the measure of value. 

Tobacco, although a clumsy medium of exchange, in 
principle is not different from gold and silver, which 
are mined in unequal quantities yearly. 

It was the discovery of gold in Alaska and the conse- 
quent enlargement of this medium that allayed the free 
silver talk of the nineties, not any law passed by 
Congress. Increase in the volume of gold brought down 
its price, and relieved the evil of contraction and low 
prices. 

In the above discussion, by prices we mean the general 
level of prices, or the purchasing power of the dollar. A 
change in the general level of prices is in reality a 
change in the value of the dollar and such a change is 
just as great an evil as a change in the measure of 
length would be. It is a change in the value unit and is 
analogous to a change in the length of the yardstick. 

When a man exchanges his goods for any medium of 
exchange, his only concern is that what he receives shall 
be accepted from him at the same value measured in 
dollars and cents. 

A stable value for the dollar does not mean that indi- 
vidual prices should remain constant. We have no right 
to ask that a given amount of the medium of exchange 
shall exchange for the same amount of flour or clothing 
or labor the next year as it does this. Individual prices 
of individual commodities must be determined by the 
demand for and supply of the particular article or 
service. 

The sole object of any medium of exchange is to 



90 THE STRANGLE HOLD 

keep track of credits. It is a system of book-keeping, 
and the book-keeper should be on the square, so that a 
given credit shall mean the same thing from one time 
to another. 

The unit of value — the dollar in the United States, 
should transfer the same amount of value at all times. 
The amount of value commanded by the different com- 
modities may vary, and must vary, with changing condi- 
tions of supply and demand of those commodities, but 
the amount of value which the dollar measures must be 
expressed in unvarying units. 

Value is divided into fixed units only for purposes of 
comparison — in order that we may compare the worth of 
one commodity with that of another — and of what use 
are those units unless they mean the same thing at all 
times the same as do other measures? The value of the 
dollar must not fluctuate. That is, the average price 
level must remain constant. 

This is in nowise affected by the substance out of 
which the measure of value happens to be made. There 
is no more need to make an eagle out of gold, a dollar 
out of silver, and a cent out of copper, than to make a 
yardstick out of gold, a foot rule out of silver, and an 
inch measure out of copper. 

We are interested in the thing measured and not in 
the measure itself. Convenience is the only rule to be 
followed here. 

These then are the two requirements which the ideal 
medium of exchange must possess : confidence, or unvary- 
ing acceptability, and stability, or unvarying value. 

The value or price of the dollar depends upon two 



A PERFECT EXCHANGE SYSTEM 91 

factors and their relation to each other. These are, the 
volume of the medium of exchange — the number of dol- 
lars in circulation — and the volume of business trans- 
acted by that medium — the number and amount of the 
exchanges which those dollars must effect. 

Convenience alone dictates the actual relation between 
these two, that is, the number of dollars which are best 
adapted to effect the exchange of a given amount of 
value, but once this relation has been set, it should remain 
fixed, and not fluctuate, as it does today. 

The fluctuation of this relation — the number of dollars 
to a given amount of value — occurs only because the 
medium of exchange does not vary hand in hand with 
variations in the volume of business. 

As we have already seen, if the volume of business 
increases while the volume of the medium of exchange 
remains unchanged, then each unit of the medium of 
exchange, each dollar, will have to exchange a larger 
amount — will have to do more work. Prices will go 
down, that is, the price of money will go up. The value 
of the measure of value has increased, and the results 
are analogous to the results of an increase in the length 
of the measure of length. When the dollar stretches 
it takes more wheat to make a dollar's worth and if the 
yardstick would be stretched it would take more cloth 
to make a yard. If the volume of the medium of ex- 
change was normal before the volume of business in- 
creased, then it is insufficient now, and the community 
is suffering from contraction. 

The very same thing happens if the volume of business 
remains the same and the medium of exchange shrinks. 



92 THE STRANGLE HOLD 

Inflation, as we have seen, has the opposite effect. It 
is the result either of a decreased volume of business with 
the same volume of the medium of exchange, or of an 
increased volume of the medium of exchange with an 
unchanged volume of business. Its effects are similar to 
those which would follow if we squeezed the yardstick 
down, so that it became shorter. The value of each unit, 
each individual dollar, decreases, and the general level 
of prices increases. 

Inflation raises prices and deflation lowers them. 
This change occurs without any change in the supply of 
or demand for the various commodities other than as the 
demand is affected by the volume of money. It really is 
not that the prices of any commodities have changed, but 
that the value of the dollar has fluctuated. 

And now we see that the only way to stop the dollar 
from fluctuating in value is to tie the medium of exchange 
in such a way to the volume of business that the two 
will always vary together. 

If the volume of business is cut in half, the volume 
of the medium of exchange will then also be cut in half, 
and a single dollar will express the same amount of value 
as before. 

And if the volume of business doubled, then the volume 
of the medium of exchange would be doubled, and a 
dollar would still be worth just as much as, and not more 
than, before. 

We require a medium of exchange, then, that is elastic, 
and, furthermore, this elasticity must be governed by 
the volume of business, so that the relation or ratio 
between the volume of business and the volume of the 



A PERFECT EXCHANGE SYSTEM 93 

medium of exchange shall always remain the same. 
When this is done, the value of the dollar will not 
fluctuate. 

An apparently natural question that would arise at 
this point is, what volume of medium of exchange is 
suited to a given volume of business ? What amount of 
money is necessary to a community ? 

Economists in the seventeenth century attempted to 
answer this question in definite terms. 

For instance, Sir William Petty set the amount of 
money necessary as one half the rent of land, one fourth 
the amount of the building rent, and one fifty-second 
part of the annual wages of labor — this last indicating 
that wages were paid weekly on the average. 

The philosopher Locke's view was that the amount of 
money necessary in any community was one-fifth of the 
laborer's wages, one- fourth of the land owners' revenues, 
and one-twentieth of the traders' yearly returns. 

Modern economists have had the good sense not to 
venture a guess at this question, which in fact, is an 
unanswerable one. 

But while no attempt is made by modern writers to 
fix the volume of the medium of exchange required for 
business the idea still persists that there is some fixed 
ratio or amount. The idea shows itself in such expres- 
sions as, "Business will revive when we get back to 
NORMAL," "Good times will return when prices come 
to NORMAL," "NORMALCY will bring prosperity," 
etc. 

All such expressions suggest that the user believes 
there is a normal condition to be reached under our 



94 THE STRANGLE HOLD 

present system. That is they suggest that there is a 
certain fixed volume for our medium of exchange or at 
least that there is a certain fixed ratio between the 
volume of business and that of the medium of exchange. 

If there ever was or could be such a ratio it is evident 
that it is impossible of attainment under our system so 
long as it is based on a fictitious reserve and is privately 
controlled. The truth of this statement should be per- 
fectly apparent for it has been demonstrated beyond 
question that under our present system the volume of 
the medium of exchange controls the volume of business. 
When the private control lets out credit and allows busi- 
ness to get into a prosperous condition the demand for 
credit increases and runs bank credit up against the re- 
serve, the "freezing" point, and "Frozen Credits" cause 
a slump. Consequently our condition is never normal 
and never can be so long as these defects remain. The 
fever of prosperity produces the subnormalcy of slump. 
So we are always looking for "NORMALCY," meaning 
a condition of peace and good will, but "NORMALCY" 
never arrives. Our exchange system makes our normal 
condition one of uncertainty, worry and turmoil. 

A normal condition, however, can be reached when by 
public control we tie the volume of the medium of 
exchange to the requirements of business so that the 
demands of business will control. Then normalcy will 
arrive, for if the medium of exchange were placed under 
such conditions the volume would take care of itself, it 
would be automatically regulated to the correct amount, 
being neither more nor less than necessary and the dollar 
would not fluctuate in value. 



A PERFECT EXCHANGE SYSTEM 95 

Since the medium of exchange is only a means to 
an end and not an end in itself — the end being to facili- 
tate trade, that is to permit one to obtain what one de- 
sires in return for what one has, the simplest medium 
of exchange would be one from which all concrete at- 
tributes were taken away. 

That is to say, it would be merely a process or system 
of book-keeping, and entirely abstract. 

Whoever sold anything would receive from the pur- 
chaser his I. O. U. for the amount of the price. Who- 
ever bought anything would give his I. O. U. to the 
seller for the amount of the price. These I. O. U.8 
would be sent to a central clearing house, where those 
taken by any particular person would be cleared against 
those given out by that person, and the balance would 
be charged or credited to him according to whether the 
amount of those received fell short of or exceeded the 
amount given out. 

This arrangement would be an ideal financial system. 
By such a system the facility for exchanging goods and 
services would be practically perfect. The medium of 
exchange would be perfectly elastic, for its amount would 
vary in exact proportion to variations in the volume of 
business. Such a system would allow perfect freedom 
in the exchange of goods and services, and would not 
control or hamper trade and production. 

But, while such a medium would fulfill one of the 
two necessary requisites of an ideal medium of exchange, 
it would not satisfy the other. It would answer the need 
of stability by proper elasticity, but it would not fulfill 
the need of confidence. 



96 THE STRANGLE HOLD 

The illustration is founded upon a false assumption, 
the assumption that every one is honest and capable 
of fulfilling every obligation, and that every one knows 
that every one else is honest and capable. In other 
words, it assumes one hundred per cent confidence in 
one another among all the individuals of the community. 
This is a false assumption, since the human race is not 
invariably honest, and probably even less capable of ful- 
filling every obligation. The entire supposition, there- 
fore, is false, and such a financial system could not bo 
instituted. 

The system is at one extreme. It satisfies one require- 
ment, the requirement of stability in value, but it falls 
entirely short of the other requirement, that of con- 
fidence. 

The metallic system is at the other extreme, it ful- 
fills the requirement of confidence, but does not fulfill 
the requirement of elasticity, and consequently of 
stability. 

The metallic system is one in which certain metals 
Sform the medium of exchange. Such a system would 
exist if gold alone formed the entire medium. 

Owing to its scarcity, and universal desirability, gold 
possesses something in the nature of an intrinsic value, 
and this quality gives to it the necessary requirement of 
confidence. But the other requirements of elasticity and 
stability, would be absent, in a metallic system. For, as 
was shown in preceding chapters, the quantity of the 
metal does not vary with the variations in the volume 
of business. On the contrary, as commerce and industry 
increases, the production of gold tends to decrease. 



A PERFECT EXCHANGE SYSTEM 97 

The metallic system then is at the other extreme. 
The requirement of confidence is fulfilled, but the re- 
quirement of stability through proper elasticity is not 
fulfilled. 

Let us now examine the medium of exchange which 
we actually do use, bank credit, in order to determine 
what requirements are necessary to make it a better 
medium. 

The requirement of confidence is partly fulfilled, fop 
people to a great extent are willing to accept bank 
credit in return for their goods. But it is only partly 
fulfilled, a fact which is at once illustrated by the neces- 
sity for keeping monetary reserves behind bank deposits. 

The requirement of elasticity is also partly fulfilled by 
a complicated system of reserves, for the volume of bank 
credit can be increased or decreased without entire 
reference to any particular commodity; but this is only 
within certain limits, partly because it is still tied to one 
commodity — gold. 

Upon examination it appears, however, that our pres- 
ent medium of exchange is not essentially different from 
the ideal arrangement mentioned, where perfect confi- 
dence was assumed, and personal I. O. U.s were the 
medium of exchange. 

The chief difference is that, not having entire confi- 
dence in one another, our I. O. U.s, instead of being 
used directly, are traded for the banker's I. O. U., in 
the form of a bank credit or deposit, which is trans- 
ferred back and forth among us by means of checks. 

It does not necessarily follow that the banker is any 
more honest or capable than any other individual in the 



98 THE STRANGLE HOLD 

community, but the increase of the banking habit has 
made his credit better known, and our banking laws 
have promoted public confidence. Therefore, bank credit 
is more acceptable than private or personal credit. 

Bank credit, then, fulfills both essential requirements, 
to a limited extent. 

By this limitation, bank credit falls short of being 
an ideal medium of exchange, as it is constituted today. 

But this does not necessarily prove that bank credit 
could not be made the ideal medium of exchange. In 
fact, it points rather to the opposite conclusion. 

Since it possesses both qualities to a certain degree, 
it is probable that a proper means of creating and using 
this medium of exchange would make it an ideal medium. 

This conclusion is still further strengthened by the 
fact that the reasons for its limitations are not reasons 
necessarily bound up with the medium itself. 

For instance, the reason why bank credit, as we have 
it today, does not fluctuate in volume with variations in 
the amount of business activity, is because the control 
of the volume of bank credit is in private hands, and 
because it is based on a false standard, — gold converti- 
bility. Neither of these faults are inseparable from 
bank credit, and consequently these bad qualities can be 
exchanged for qualities that will enable the volume of 
bank credit to fluctuate according to the needs of busi- 
ness. 

The problem, then, is comparatively a simple one. No 
radical change is necessary. The present system needs 
but slight alteration and reformation in certain features 
in order to give us the ideal medium of exchange. 



A PERFECT EXCHANGE SYSTEM 99 

The alterations required are such as will, in the first 
place, put one hundred per cent confidence behind bank 
credit, and in the second place, take the control of its 
volume out of private hands. 

It must be issued so all will know it is safe. Control 
must be placed where variation in volume will be regu- 
lated by business activity, so that at no time will there 
be too little of the medium of exchange in circulation, 
and likewise never too much, but always the exact 
amount required for the needs of business. 

Bank credit is no different from any other credit and 
consists of confidence and time. The greater the confi- 
dence the longer the time. 

One hundred per cent confidence is confidence which 
will extend for practically an unlimited time. This con- 
fidence the present financial system lacks, as is shown by 
the 30, 60 and 90 day limit placed on bank loans. It is 
the lack of public confidence in the bank that causes this 
lack of time in bank credit and prevents our banks from 
carrying the long time credits necessary for agriculture 
and foreign trade. 

A practical remedy must supply the 100% confidence 
necessary for the perfection of our medium of exchange. 
Then reserve requirements, the gold standard, and all 
similar makeshifts used for the purpose of holding con- 
fidence would disappear, and the banks could carry any 
good credit for any length of time. 

All good securities would be liquid assets. They would 
be bankable securities. Industry would no longer suffer 
from short time credits or from periodical setbacks, 
because credit had frozen up. The cause of "Frozen 



100 THE STRANGLE HOLD 

Credits," "Buyers' Strikes" and recurring periods ©f 
depression would then be removed and progress and 
prosperity would go ahead without interruption. 

The other part of the problem is to ensure the proper 
variation in the volume of the medium of exchange, so 
that expansion and contraction of the medium will not 
affect the value of the dollar but will occur only as 
business expands or contracts and industry will be 
allowed full swing. 

Both these objects can be accomplished by taking 
bank credit, the medium of exchange, cut of private 
hands and putting it under the proper public control. 

The next step then is to show how this can be done in 
a practical way. 



CHAPTER VII 
100% SAFETY AND ELASTICITY 

NOW that we have come to a point where we can 
seek to apply a remedy for the situation, we 
see that the problem is a double one, that it has two 
parts. 

In the first place, it is necessary so to tie the volume 
of the medium of exchange to trade and industry that it 
will correspond to variations in the volume of business. 
This regulation is necessary in order to stabilize the 
value of the dollar and to provide a constant general 
level of prices. 

Secondly, we have the problem of gaining and holding 
full public confidence in the medium ; so it will be readily 
accepted by all. 

The system must be such that everyone will know that 
he in turn will be able to get rid of the medium of ex- 
change in payment for what he wants ; without a shrink- 
age in value. 

In short, the medium of exchange must be such as 
will possess stability through proper elasticity, and 
safety through full confidence. 

With regard to the first requirement, we see that it 
is based, of course, upon the method in which the medium 
of exchange comes to vary in volume, and we see that, 
since bank credit is our medium of exchange, and the 
banker has full power to extend bank credit or withold 

101 



102 THE STRANGLE HOLD 

it, the variations in volume are today entirely in the 
hands of the bankers. 

Since the power to refuse or to grant a loan determines 
the volume of the medium of exchange, the elasticity of 
that medium depends upon this power. 

We have here the kernel to the solution of one part 
of our problem. This power, to grant or refuse a loan, 
must be so placed that it will operate only when business 
demands it. It must operate so that the medium of ex- 
change will always be there for use when trade and 
industry demand it. The question of whether a loan 
should be granted or refused should be answered only by 
the demands of business in such a way that the medium 
of exchange will vary in volume directly as the amount 
of business offered may vary. 

As begins now to be clear, and, as will be shown more 
forcefully very soon, the arrangement necessary to ac- 
complish the desired end, involves the taking of the 
power to decide loans out of private hands. 

Confidence in bank credit depends upon the security 
behind the loans made by the banks and, therefore, the 
methods used in granting loans determines the amount 
of confidence or safety in our medium. 

When people know that there is full value behind any 
medium of exchange, then they are willing to accept it 
at full value. 

When they do not know whether or not there is full 
value behind it, they are always in fear of it or they 
will accept it only at a lesser rate, depending upon the 
degree of certainty or uncertainty. 

This lack of knowledge as to what is behind bank 



100% SAFETY AND ELASTICITY 103 

credit is the reason why, when anything occurs to shake 
the confidence of the people, they rush to withdraw their 
deposits from the banks. They feel uncertain as to the 
value behind their money in the form of bank deposits, 
or bank credit, whereas they always feel perfectly cer- 
tain about the value of gold. 

It follows, from the foregoing, that if people could be 
made to feel quite certain that there is full value behind 
every dollar's worth of bank credit demand would never 
be made for payment of bank deposits in money. The 
people would accept it at full value without fear, and 
panics and bank runs would be abolished. 

With one hundred per cent confidence in bank credit 
gold reserves and in fact no legal reserves would be 
necessary. 

The remedy involves, then, the substitution of a more 
logical security than the promise to pay gold as the 
value behind the medium of exchange in circulation. 

This security must be of such a value as will bring 
with it absolute, one hundred per cent confidence in the 
medium, so that it will always be acceptable. People 
must never feel doubtful as to the likelihood of their 
getting value in return for it. 

These principles then, are the general points that are 
to guide us in fitting the remedy to the conditions re- 
quiring reform. 

For greater convenience in proceeding, we may divide 
the process of creating the medium of exchange, bank 
credit, into three steps or phases. 

The first phase is, whether the credit shall be created 
or not, whether the loan shall be advanced or not. 



104 THE STRANGLE HOLD 

The second step is the appraisement of the value of 
the security offered for the loan. 

The third step is to determine what percentage of the 
appraised value can be safely loaned against the security. 

These demarcations are not very important in them- 
selves. All the steps are always present in making a 
loan, but they are not clearly marked off from each 
other. However, owing to the greater ease and simplicity 
of dealing with the problem in this manner, we may fol- 
low the demarcation, keeping in mind that it is neither a 
very pronounced nor a very important one. 

Our present method of issuing bank credit is as fol- 
lows: 

When a person applies to a bank for a loan, the first 
thing the banker does is to appraise the security. Since 
this is the customary order, we will discuss this step first. 

In the case of personal property the value is easily 
ascertained from market reports or discount sheets, but 
in many cases an appraisement of real property is but 
a guess at the value, and a one-sided guess at that. Not 
only does the result depend upon the banker's limited 
information, but his self-interest, personal friendship 
and prejudices, may also enter into the transaction. In 
fact some loans are made without security. The public 
knows that these conditions exist and, consequently, the 
people cannot have full confidence in the medium of 
exchange that is created by the loan. 

Here, then, we see the first particular need of reform 
and that is in the matter of appraising the value of the 
security offered for the loan. 

At this point we may recall the banker's set formula, 



100% SAFETY AND ELASTICITY 105 

"The security is good but not bankable." Our first step 
is to ascertain just how good the security is and this 
must be determined in such a way that every member 
of the community will accept the appraisement of the 
security as being the true value. 

Our system must be such as will determine the true 
value of every kind of property, both real and personal, 
and the method used must be such as will impress the 
people with the fact that it is the real value. Every 
member of the community must accept and believe in 
every security and every good security must be a bank- 
able security. 

The farmer's land, the merchant's goods and the bond 
holder's bonds, must all be equally ' 'liquid" and all 
equally acceptable as security for a bank loan; the 
percentage of the loan to the value depending on the 
stability of the value of the security offered, that is on 
the fluctuation in its price. 

Now it so happens that we already have two separate 
systems of public appraisal which cover all property. 
With a slight and simple change in one of these systems 
they both become excellently adapted to the appraisal 
of securities offered for bank loans. And at the same 
time by the change in one of these systems it will 
operate all the more satisfactory in its present field. 

Practically all personal property such as stocks, bonds, 
wheat, cotton, leather, etc., is appraised every day by 
sales on the various exchanges or in the markets where 
such goods are handled. The actual value is established 
daily and the price is published so this system needs no 
revision. 



106 THE STRANGLE HOLD 

And, as every taxpayer knows, the machinery for the 
public appraisement of all private property operates 
throughout the country. All private property is ap- 
praised for taxes by the public assessor. It is true that 
this system at present has its faults. In some parts of 
the country it is laxly or unfairly regulated and admin- 
istered. In others, however, it is carefully handled. 
With a slight change in state laws, which will place no 
added burden on the taxpayers, the assessor's records 
can be made to serve with entire satisfaction in the ap- 
praisal of securities, not otherwise appraised. And what 
is more, these records will on that account become the 
more accurate and satisfactory as a basis of taxation. 

It is obvious that, at present, it is to the personal 
interest of the tax-payer to have as low a valuation as 
possible placed upon his property, since a low assess- 
ment cuts down the amount of taxes he has to pay. And 
even though he be perfectly honest, the desire to save 
taxes will nevertheless have a tendency, even if an un- 
conscious one, to make him lower the valuation. 

Precisely the opposite is the case, on the other hand, 
when the property holder is seeking to obtain a loan 
from the bank with the same property as security. Then 
his interest is to make the valuation as high as possible, 
thereby increasing the loan that he may negotiate upon 
it as a basis. 

It follows then that if the same appraisal is used 
to determine the value of property both for one purpose 
and for the other, the two conflicting tendencies will 
operate against and so neutralize each other. 

In consequence of this conflict the very force of self- 



100% SAFETY AND ELASTICITY 107 

interest will be the cause of a just valuation. For as a 
tax-payer the property-holder will seek the lowest valu- 
ation, and as a person desiring a loan the same property 
holder will seek the highest valuation. Where one valu- 
ation is made to serve for both purposes, the conflicting 
tendencies will counteract one another, and a fair or just 
valuation must be the result. 

The tax laws generally provide that property shall be 
assessed at its "true value." At present the value of 
property for tax purposes is set arbitrarily by the 
assessor, and is subject to revision only by a board of 
equalization. 

This method of appraising property is fully as re- 
liable as the method of appraisement used by a bank. 
However, in neither case is the true value arrived at. 
Both systems are based on the opinions or guesses of a 
few men, whose views are often colored by prejudice, 
personal interest, and favoritism. 

A system for the appraisal of securities for bank loans 
must be entirely beyond the reach of any personal in- 
terest or human weakness. Guess work and prejudice 
must be overcome and it must be made apparent to the 
whole community that the true value has been de- 
termined. 

Now, as we have just seen, if valuations given on the 
tax-rolls were made to serve as valuations of security 
for bank loans, tax-payers and borrowers, caught be- 
tween their conflicting interests, would strike a mean, 
or true, value. Over-valuing the property would secure 
no advantage to a borrower, for the banker would insist 
on cutting down the amount loaned — the percentage of 



108 THE STRANGLE HOLD 

the loan to the value. The nei result of over-valuing 
then would only tend to a loss for the property owner 
through increased taxes. 

Under-valuing would cease also, for since the tax rate 
is fixed by dividing the amount to be raised for govern- 
ment purposes by the whole amount on the assessment 
roll, under-valuation would be of no advantage to the 
community, for it would result only in raising the tax 
rate and would not affect the amount paid as taxes. 

Assessment values mean comparatively little today 
but, if those values were to become the true value and 
were accepted as such by the banks and the community 
it would be a very different situation. Comparison of 
value is so easy that the boosting of value by the would- 
be borrower and the under-rating of the tax evader would 
cease. 

The effect of the slight change suggested would be 
very far reaching. It would compel honesty and square 
dealing. Personal interest would force the community 
as a whole to give its support to an honest valuation of 
all property for all purposes. 

It is a matter of common knowledge that there is no 
system of appraisement in use today which can be 
relied upon to give the true value of real property for 
any purpose. However, by a slight change involving no 
expense, the tax system of any state can be made to de- 
termine the true value on every piece of property both 
for tax and security purposes. 

Self interest operates automatically so the result of 
all the interests in the community operating at once 
would give an impersonal or automatic result. 



100% SAFETY AND ELASTICITY 109 

The legislation necessary to establish a system which 
would secure an automatic appraisement acceptable as 
a basis for loans is quite simple. 

Existing law provides that an aggrieved taxpayer 
may submit his grievance to the board of equalization and 
review for adjustment. However, the result of an ap- 
peal to this board at the present time is seldom satis- 
factory, and if the complainant succeeds in getting the 
relief sought it does not accrue to the benefit of those 
who do not complain. Justice is consequently not at- 
tained. 

But were a law adopted which would make the assessed 
value of a property also its security value, the uncer- 
tainty and injustice in our present method of levying 
taxes would be rectified. Personal interest, as we have 
seen, would soon fix the true value of every property. 

The assessor today is placed in a peculiar position. 
The law says he must assess all property at the "true" 
value, but taxpayers are always seeking low assessments, 
and there is no way to determine the true value, so the 
assessor while in a difficult position exercises a more 
or less arbitrary power. 

The assessor's difficulties as well as his arbitrary pow- 
er can both be done away with by giving the taxpayer a 
right to appeal from his assessment and also from the 
decision of the board of equalization. A practical meth- 
od of hearing this appeal and deciding the question will 
be shown later. And what is still another good point 
about this suggestion, the change that would have to be 
made necessitates only a trifling one in existing law, and 
involves no dangerous experiment. The only radical 



110 THE STRANGLE HOLD 

thing about the whole affair would be in the resalt, which 
would be a very radical change for the better in all con- 
ditions affected. 

Let us suppose that a law were enacted making the 
assessed value of every property also its value as a 
security, and a taxpayer then felt a grievance over the 
assessment — he felt that an incorrect valuation had been 
placed upon his property, either for the purpose of pay- 
ing taxes or of securing a loan, that is, he thought it 
was assessed either too high or too low. 

The legal remedy now would be to appeal from the 
assessor's decision to the board of equalization and re- 
view for relief. Under the methods in use today the 
relief, if any, obtained from this board is seldom satis- 
factory but, with a slight change in existing law, perfect 
satisfaction could be assured. The true value of every 
piece of property for both tax and security purposes 
could be obtained with little trouble. 

Give to every taxpayer the further right to appeal 
from the decision of the board of equalization and re- 
view. Then pass a law authorizing the clerk of the 
board of equalization to subpoena witnesses, call jurors 
and conduct hearings. Then if the board's decision 
should fail to satisfy, the aggrieved tax-payer or ap- 
plicant for a loan he would have the right to appeal 
from the board's decision and have the value of his 
property fixed by a jury. 

Only those especially qualified should be eligible as 
jurors. If personal property is to be appraised this 
qualification should include only such as are well versed 
in the value of the kind of property in question. In 



100% SAFETY AND ELASTICITY 111 

the case of real property, it should include only those 
who own property of the same kind, or similar property 
in the neighborhood. A two-thirds verdict of such a jury 
of arbitration would settle the dispute. 

The right to submit all questions of assessment to such 
a jury would entirely overcome all arbitrary power of 
the assessor and completely do away with the present 
inefficiency of the board of equalization. Without doubt 
the decision of such a jury could be relied upon, because 
the jurors, being property owners themselves, would be 
deciding the value of their own property by their verdict. 
Self interest would dictate the verdict. 

The owners of similar property, who did not want 
to sell their property or borrow money on it, would 
naturally favor a low valuation in order to cut down 
their taxes; while on the other hand, those who did 
want to sell or borrow would be inclined to favor a 
higher valuation. 

Again, we have a conflict of personal interest, and 
once more the result of this conflict would be a more 
just valuation. 

This conflict of personal interest among the jurors 
would compel a compromise in the verdict such as would 
result in showing the true value of the property. It 
would, consequently, be a guarantee of justice to all, 
both to borrowers and taxpayers. Taxation and loans 
would both be on the "True value." 

Here, then, we already have the machinery for ap- 
praising property which, with only a few slight changes, 
could be used most satisfactorily in obtaining a proper 
and just valuation of all property. It would supply a 



112 THE STRANGLE HOLD 

long felt want for reliable appraisement for all purposes, 
especially for real property. 

And the publicity of this appraisal, together with the 
acquiescence of the public in its result, would cause en- 
tire public confidence to be placed in the medium of 
exchange, the bank credit, which would be created as a 
result of the ensuing loan. 

While this method of appraisal would apply more 
particularly to real property, we have another system of 
machinery, as previously stated, already in operation 
which would continue to determine the valuation of most? 
personal property. The values set by it would be 
accepted just as they are now. 

It is a matter of common knowledge that the price 
of practically all property, except real estate, is set every 
day in the various central markets such as the stock ex- 
change, cotton exchange, wheat pit, and the wholesale 
and packing house districts. These prices are printed 
daily on the financial pages of every metropolitan news- 
paper and are generally accepted by the banks and 
everyone else as the true value. 

Prices of manufactured products are to be found in 
the price lists and discount sheets of manufacturers and 
jobbers. 

For all personal property, therefore, there would be 
little need to institute an assessment, board of equaliza- 
tion and a jury to fix a valuation. We already have a sys- 
tem of machinery which fixes the true value of such prop- 
erty every day. Under our proposed system we would 
take these valuations as the security-value for bank 
loans, the same as they are now taken. 



100% SAFETY AND ELASTICITY 113 

At present tbese values are affected by the contrac- 
tion and expansion of the medium of exchange but, since 
our remedy would entirely do away with the fluctuation 
of the value of the dollar due to such phenomena, the 
value of all property would then be much more stable. 

It is very probable that the need for appraisals of 
real property by jury would also soon diminish. In 
order to settle real estate values, several arbitrations in 
a neighborhood might at first be necessary, but they 
would result in the establishment of stable values which 
would change but gradually. 

The provision which requires the jurors to be specially 
versed in the value of the kind of property under dis- 
cussion, or to be owners of similar property in the same 
neighborhood, would secure the best judgment of the 
community as to value. Afterwards established values 
would be constantly checked against sales and net in- 
comes. 

The method of appraisal suggested here as applied 
to real property, would be extended so as to cover all 
property, not at present valued in a satisfactory way. 
This method of appraisement, by opposing the personal 
interests of the whole community to the personal in- 
terests of the individual, makes itself proof against in- 
dividual favoritism. It rests upon the solid' rock of the 
self-interest of the majority, and consequently the 
system would work automatically. 

In this way the desired result would be obtained. For 
with such publicity, and such a method of appraisal, in- 
suring a proper valuation of all property used as se- 
curity against which bank credit could be issued, the 



114 THE STRANGLE HOLD 

public would have full confidence in the resulting medium 
of exchange. 

So much then for one step, the safe public appraise- 
ment of property for bank loans. Now let us proceed 
to the next step, the determining of the percentage of 
loan to value, that is the amount which could be loaned 
on any particular kind or piece of property. 

Just as the placing of the actual appraising of prop- 
erty in public hands would give public confidence to the 
resulting valuation, so would placing the authority to 
say on what terms a bank may make a loan and how 
much it may lend on any property. This fixing of the 
percentage of the loan is a simple matter and requires 
neither technical knowledge nor special information. 

The relative safety of various securities is quite well 
established. The less the fluctuation in the price of a 
security, the safer it is as a basis for a loan, and con- 
sequently, the higher should be the percentage of the 
loan to the actual appraised value. 

Thus good bonds, and business property in well estab- 
lished communities come under the heading of gilt edged 
security, and command the highest percentage. From this 
mark, which may run as high as eighty or even ninety, 
the percentage will shade down to twenty or even ten 
per cent on a hazardous security. 

Here again the proposed plan would involve no great 
change in present-day methods, except to the extent of 
taking the determining of this percentage out of the 
private hands of the banker, and placing it in public 
hands. By so doing we would do away with favoritism 
and at the same time insure the safety of the loan and, 



100% SAFETY AND ELASTICITY 115 

consequently gain public confidence in the resulting me- 
dium, the bank credit that is created by the loan. 

What is required in this phase of the matter of crea- 
ting bank credit, then, is a proper authority in whose 
hands may be placed the function of establishing a table 
of percentages of loan, to value for various kinds of 
property. 

This duty would not call for expert knowledge. The 
present banking practice, which is the result of experi- 
ence, would be a sufficient and a safe guide for the au- 
thority to whom this duty might be intrusted. And the 
advantage of such a method would rest not only in its 
simplicity but in the fact that, since the resulting per- 
centages would be determined publicly and would have to 
be published, everyone would become familiar with them. 

If they should be placed too high the banks would 
not make the loans and if they were too low those 
affected would agitate until they were raised. These per- 
centages would have to be fixed at a point where both 
bankers and the public would agree that they were safe 
and just. The public would then have full confidence in 
the bank credit issued for all would know there was 
ample security behind every bank loan. 

And once more we find that we have a system of ma- 
chinery for this operation also, that is already at hand, 
and which, with a few changes, can be admirably adapted 
to the new purpose. 

The banking laws of the nation and of the various 
states now provide a public authority whose duty it is to 
supervise the banks established under those laws. In the 
hands of this authority, whether a Federal Reserve 



116 THE STRANGLE HOLD 

Board, or a State Superintendent of Banks, we find the 
proper place to entrust the power and duty now under 
consideration. 

The plan needs little explanation. It consists mainly 
in giving to the public authority the right to regulate 
bank loans which would include the power to determine 
the percentage the loan may bear to the valuation set 
on the security ; these percentages would be set by means 
of ruleSj which, of course, must be general in application 
and should be published before becoming operative. 

The rules to be made by the public board would be 
suggested by the present banking system and should 
follow the best banking practice, and be changed only as 
experience dictates. 

Special interests could not be favored, for all rules 
Would have to be general and would have to be published. 

We have now dealt with two of the three phases of 
extending loans and so creating bank credit, the medium 
of exchange. We have seen that the solution in each 
case involves the placing of the fixing of value, and of 
the loanable percentage of all property in public hands 
in such a way as to insure both just methods and public 
confidence. 

Now let us look into the third phase, that of granting 
or refusing a loan. 

The authority^ to say yes or no to a would-be borrower, 
now rests entirely with the bank. And so long as it is 
left entirely to the judgment of private persons it will 
be tinged with favoritism. 

If a man complies with the rules for the use of any 
other public utility, he is entitled to impartial treat- 



100% SAFETY AND ELASTICITY 117 

menL If he buys a railway ticket he has the right to 
ride regardless of whether the conductor favors or dis- 
likes him. 

To accomplish justice, so that all may use this, the 
greatest of all our public utilities, upon fair and equal 
terms, the final power of granting or denying the use of 
the medium should then also be enforced by public 
authority and applied impartially to all applicants. 

The question is likely to arise — Do not the banks com- 
pete with each other in getting business, and is not lend- 
ing money the most important source of bank revenues; 
therefore, do not bankers exercise the greatest liberality 
in their dealings with borrowers, unless perhaps in a 
remote community controlled by a narrow-minded 
banker ? 

The answer to this question is in the negative. The 
objection will seem valid only to the uninitiated person 
who has never done business with banks. For the truth 
is that banks do not compete in making loans. Take 
the case of a business man, for instance, who has a going 
business and desires a loan. He approaches the First 
National Bank say with which he has an account. The 
bank officials may have been offended by his political 
activities or business methods, or his interests may run 
counter to those of some of the bank directors. So he is 
informed that the bank is not prepared to extend its 
loans. 

Knowing that he is deserving of credit, the business 
man then goes to the Merchant's National Bank and ap- 
plies for a loan. He is asked by officials there who 
his bankers are. When the answer is made that he has 



118 THE STRANGLE HOLD 

been doing business with the First National, the reply 
to his application for a loan will probably be the stereo- 
typed one: "We would appreciate your business, but it 
is against our policy to open an account with a loan." 

The foregoing is but a single instance of the dis- 
crimination which prevails in the matter of extending or 
refusing bank loans, and so of permitting or denying 
the use of the medium of exchange, under our present 
system of unrestricted private control. The removal of 
this discrimination is possible only by placing the use 
of the medium of exchange under public control. 

However, public control of bank loans should not be 
effected in any such manner as to hurt the banks, or 
to take just profits or powers away from the banker* 
Any reform should be dictated solely by the desire to 
make the bank more serviceable to the community. 

The only object of any suggested change should be 
to secure the fair and equal use of the medium of ex- 
change, upon safe and equal terms, by all members of the 
community who can comply with the conditions and pay 
for the privilege of using St. While divesting the 
banker of all power to show favoritism he must be left 
free to protect himself against loss and should, there- 
fore, be assisted in making all loans safe. He should 
be encouraged to refuse a loan so long as there is any 
doubt as to its safety, but he must not be permitted to 
refuse one on any other grounds. 

Bankers are inclined to lay stress on the "moral 
hazard" of a loan which suggests that some men are 
more reliable than others. The fact that there is a 
difference in reliability among men may be admitted 



100% SAFETY AND ELASTICITY 119 

but that the banker has any means of knowing which 
are and which are not reliable is not admitted. 

His surmise in this direction is due altogether too 
much to favoritism or personal interest. And even if 
the banker were infallible and did know who are and 
who are not reliable all loans must not only be safe 
beyond question, but the people must know they are 
safe. There is therefore, but one basis, safe security. 

The safety of our medium of exchange is a matter 
of such importance to all that we cannot let it rest 
even in a slight degree on the guess of anyone as to 
the reliability of a borrower. "Moral hazard/' while 
not denied, must be disregarded. 

The present practice of banks lending without security 
to those well and favorably known to them could prob- 
ably be continued under proper restrictions provided the 
bank does not lend in this way more than the bank's 
paid up capital and surplus. 

The capital and surplus of the bank may be con- 
sidered as private property and subject to private con- 
trol the same as other private funds. If the stockhold- 
ers see fit to give the bank management the right to 
exercise their judgment as to "moral hazard" up to 
the amount of the capital and surplus that may be con- 
sidered a private matter. 

But when the bank goes beyond its capital and sur- 
plus in making loans it becomes a public matter, for the 
bank is then trading solely on public laws and public 
confidence. It is performing a public function, that of 
issuing our medium of exchange, and favoritism must 
be eliminated. 



120 THE STRANGLE HOLD 

For its own protection, and in order to insure safety 
to our medium of exchange, every bank must be allowed 
to refuse loans under certain conditions. But in order 
to guard against unreasonable refusals, resulting only 
from personal prejudice, partiality or personal interest, 
the banks should be required to give with all refusals 
a written statement of their reasons for such refusal. 
The borrower should then be given a chance to remove 
the objections or to protest this refusal before the pub- 
lic bank supervising authority, and if it should appear 
that the loan was refused for any other reason than to 
guard against a bad loan the bank should be severely 
penalized. 

If found necessary to insure fairness to all, the bor- 
rower might be given the right to go direct to the 
Federal Reserve Bank when refused by private banks. 

Here, then, we have all three phases of making a 
loan covered by adequate remedies. 

In effect, the remedy, as we have suggested it, would 
be to take out of private hands and place under public 
control the right; first, to determine the value of the 
property offered as security for the loan; second, the 
right to determine the percentage of the loan to the 
value of the security; and third, the right to refuse or 
grant the loan, so that all may have the use of the 
medium of exchange on exactly the same terms. 

In the foregoing pages it has been clearly established 
that bank loans are not a personal matter between 
the banker and the borrower because they effect the 
welfare of the whole community. 

It, therefore, follows that their use is a public right 



100% SAFETY AND ELASTICITY 121 

and all must be entitled to enjoy that right upon fair 
and equal terms, and no one should be given an un- 
fair preference, or receive any unjust advantage. 

Let us see how this plan would fulfill the two re- 
quirements we have seen to be essential to an ade- 
quate system of exchange; first, stability through proper 
elasticity, and second, acceptability through public con- 
fidence. 

In the first place, the medium of exchange, would, 
under the proposed plan, vary according to the needs of 
business. For, since the determination of the volume of 
the medium of exchange would no longer be in the 
hands of private persons, the restriction on that medium, 
which we have seen inevitably accompanies private con- 
trol would no longer exist. The use of the medium of 
exchange would be a RIGHT and not a PRIVILEGE 
as it is now. Every one who could comply with the 
requirements would have equal opportunity to use the 
bank when and as desired. In other words, contraction, 
through private control, would not occur. 

And on the other hand, inflation would not exist 
either. For the plan would involve the necessity of hav- 
ing adequate security behind each loan, and, therefore, 
bank loans would not be extended beyond the needs of 
business. No one would borrow unless he expected to 
profit by so doing. 

And, as we have seen, public confidence in bank credit 
would exist to one hundred per cent. Public appraisal 
of the value of security and the fixing of the percentage 
of the loan would result in certainty that there was full 
value behind every loan extended. 



122 THE STRANGLE HOLD 

There would then be no necessity for gold reserves or 
any other reserve to bolster confidence in the banks. The 
fallacy of the gold reserve and the fiction that bank 
credit calls for money could be discarded. Public con- 
fidence in the banks would be gained and held by the fact 
that every bank loan was amply secured and, conse- 
quently, every bank deposit was perfectly safe. 

The only reform suggested here comes to the simple 
proposition of changing the basis of our medium of ex- 
change so that it will rest on the truth and good security, 
instead of on a false promise of gold redemption and a 
fictitious reserve. 

The point cannot be too strongly emphasized that 
there is no change suggested in the whole system except 
a change of base, from one of fallacy and fiction to one 
of truth and honesty. The few details necessary to 
make the suggested change are simple and practical, and 
are now well understood. That the remedy would prove a 
complete cure for our present ills, is evident, for it com- 
pletely overcomes the defects in the present system. The 
proposed method of dealing with bank loans would put 
100% safety and 100% elasticity into our medium of 
exchange. 

A further advantage is that the changes necessary 
to accomplish this end are but slight. They involve, 
as we have seen, but a few changes in present laws to 
alter existing institutions to a slight extent. 

With laws in effect to accomplish the foregoing plan, 
the method of obtaining a loan from a bank would be 
practically the same as now. The rules laid down by 
the public authority would in all probability preserve 



100% SAFETY AND ELASTICITY 123 

the present banking practice regarding loans on business 
statements and personal property in toto. About the 
only change in the making of such loans would be that 
all applicants would receive the same treatment. 

Most business would be conducted, just as at present, 
but with much greater certainty and satisfaction to both 
borrower and banker. Business men could at all times 
know just what amount of credit they were entitled to 
use and bankers would know that every loan they made 
was safe. Such a system would do away with the great- 
est source of business worry for all. 

Through the suggested method, the procuring of real 
estate loans would be greatly simplified as well as 
hastened and cheapened. The borrower would get from 
the office of the Assessor a certificate setting forth the 
assessed value of the property which he proposed to use 
as security. This "certificate of assessment" would set 
forth the ownership, the location, the amount and the 
value of the property. 

By multiplying the value of the property as set forth 
in this certificate of assessment, by the percentage as 
given in the official table of loan value, the loanable 
value of any security would be obtained and every per- 
son would know what amount could be borrowed from a 
bank at any time. 

For instance, suppose the security to be offered were 
a farm of one hundred acres. The owner would get from 
the Assessor's office his assessment certificate which 
would show his farm was assessed at say $150 per acre. 
Let us say the percentage established for such property 
were 60%. The appraised value of the farm would then 



124 THE STRANGLE HOLD 

be 100x150 or $15,000 and the loan obtainable on it 
would be 60% of $15,000 or $9,000. 

Or say the security were six automobiles priced at 
$2,000 each. Then the six would be worth 6x2000 or 
$12,000. Now, suppose that such security were listed 
as being good security for 50% of its value. Then the 
owner of the machines would be entitled to borrow from 
the bank 50% of $12,000 or $6,000 on a bill of lading 
or a proper warehouse receipt. 

In either case, when the borrower presented his notes 
and security to the bank in proper form, the loan would 
be made. If it were not made, the banker would have 
to state in writing why he refused to grant it. No trivial 
reason would be acceptable, and if a good reason ex- 
isted, it would be against public policy for the loan to 
be made until the objection were removed. 

The rules laid down would of course provide for the 
discounting of acceptances, etc., and of automobile and 
other paper on whatever terms have been found safe, so 
that the various selling plans, which have been built up, 
could be used without interruption. 

There is no suggestion of any new way of making 
loans or the use of any business forms or methods not 
now in vogue. 

No bank should be compelled to make a loan unless 
the security were proven good and on the other hand 
any bank which persistently refused to make a loan 
because of personal feeling should have its charter 
annulled. Good security for every loan and no favorites, 
should be an invariable rule. 

The object of public control of the medium of ex- 



100% SAFETY AND ELASTICITY 125 

change would always be to facilitate and not to hamper 
business. Experience would probably develop many im- 
provements on present methods but we must not lose 
sight of the fact that the first requisite of a medium of 
exchange is acceptability and that depends on its safety. 

This statement, however, does not mean that bet- 
ter methods than those in use may not be developed. 

For instance, it would not be out of place to make 
mercantile agencies such as Dun and Bradstreet public 
institutions. By so doing their records would be more 
valuable to the business world. By extending these rec- 
ords to take in the work of merchants associations, those 
who do not pay their bills as well as those who deal dis- 
honestly could be eliminated from the community. 

If paying one's debts and honest dealing were neces- 
sary as a qualification for the use of credit it would put a 
very high premium on honesty. At least the community 
could be put on its guard against those who did not pay 
their debts or deal fairly. 

This idea is not suggested as being at all necessary 
to this plan for putting bank credit under public control 
but is merely offered as an improvement on present 
conditions which might be considered later. 

By making all bank loans conform to the rules laid 
down by a public authority, and by basing them on se- 
curity which the people themselves have appraised, every 
bank depositor would know that every loan made by 
every bank was good. By this means we would secure 
to our medium of exchange the maximum of safety and 
also the maximum of elasticity. 

Thus a medium of exchange would result that would 



126 THE STRANGLE HOLD 

fulfill all the functions required of it. No longer would 
it be a hindrance to commerce and industry, but rather 
the help it should be. 

Production and trade would be allowed to expand to 
their fullest extent, for they would control the medium 
of exchange instead of that utility controlling them, and 
the results would be beneficial to all. 

Private control, which now has an automatic tendency 
to cause our medium of exchange to contract and strangle 
business as soon as prosperity makes a demand for 
credit, would be gone. Prices would remain stable 
except when affected by the laws of supply and demand. 

Business would no longer be a gamble and success 
would depend on efficiency and hustle and not on chance 
or a pull with the banker. 

A period of prosperity would not be followed by one 
of depression; all branches of industry could be financed; 
foreign trade could be carried to any degree of safety; 
our shipping business would be rehabilitated and recon- 
struction would bring peace and prosperity to a troubled 
world. All the changes made would help not alone this 
country but all humanity. 

And the advantage accruing from the fact that the 
changes required are but slight cannot be over-empha- 
sized. The real change would be in the improved con- 
ditions which would follow as a result of the change 
and which would be to the benefit of all concerned, except 
perhaps to a few who are today holding an unfair 
advantage over their fellow-men. 

The laws necessary in order to bring about the desired 
change are given at length in the next chapter. These 



100% SAFETY AND ELASTICITY 127 

laws are presented in legal form in order to show how 
easily the reform may be put into effect, and in order 
to point out definitely the way in which all the desired 
advantages can be secured, so that our social system will 
be freed from many of the evils that hamper and oppress 
it today. 



CHAPTER VIII 
BREAKING THE STRANGLE HOLD 

WE HAVE now pursued our problem in logical or- 
der. Taking up the known defects of our financial 
system, as related to our industrial and social life, we 
have shown that the same defect which has always ex- 
cluded the farmer and has recently excluded the exporter 
from the use of the bank has shut the bank doors on the 
automobile dealer and may shut it on other industries 
at any time. 

It has been shown that because of the false founda- 
tion of our system of credit — the gold standard — our 
present day industry has outgrown the system. 

The gold redemption promise has outlived its useful- 
ness and has become an automatic check on the wheels of 
industry. 

To continue to confine our credit system by a false 
promise to redeem in gold would be like trying to carry 
on the industry of the country while confining our trans- 
portation system to a narrow gauge railroad. And then, 
if private ownership of banks is going to be allowed to 
deny the use of one public utility, why not permit those 
who own the railroads the same privilege? 

Such an arrangement could not help but check prog- 
ress and cause industrial turmoil and social unrest. 

Our present depressed condition is brought about 
through industrial progress being checked for want of 
proper credit facilities. 

128 



BREAKING THE STRANGLE HOLD 129 

We have already noted that the high cost of living 
has recently been considered to be the cause of bad eco- 
nomic conditions while the social unrest of a generation 
ago was believed to be caused by the low cost of living. 
We have seen that these conditions refer to the general 
price level and are due to increase or decrease of the vol- 
ume of the medium of exchange in use. We have noted 
from our own experience or observation that high prices 
stimulate production and trade while low prices produce 
an opposite effect, but we have also noted, that a period 
of high prices, good business and prosperity is invariably 
followed by one of falling prices, business failures and 
economic depression. The cause of this phenomena has 
been definitely pointed out and has been shown to be due 
to defects in our present banking system arising from its 
private control. 

Most countries have passed through a period of devel- 
opment where the mint was in private hands. Only in 
primitive times was this important function so admin- 
istered and while it was in private hands it was subject 
to all the abuses of private control of a public utility. 

As a nation, we outgrew this national weakness, while 
quite young so its bad effects are not remembered, but 
Mexico, during the long period of internal disturbances 
and bad government preceding the period of Porfirio 
Diaz, adopted the disastrous plan of leasing her mints 
to private citizens. 

Freeing his country from the tentacles of the mint 
lessees and restoring coinage to government control was 
one of the greatest reforms carried out by Diaz, reaction- 
ary as he was in many respects. 



ISO THE STRANGLE HOLD 

Here we see the evils of private manufacture of metal 
coins. But metal coins are, in our modern system, but a 
minute part of the entire circulating medium, which is 
almost entirely composed of the credit manufactured by 
banks. 

Just as industrial and social advancement forced the 
mint out of private into public hands so must industrial 
progress and general enlightenment break the strangle- 
hold of private interests on our individual and national 
life by substituting public for private control of bank 
credit. 

The blighting effect of private control of this greatest 
of public utilities, on both private and public interests 
has been demonstrated many times and must not be lost 
sight of. 

The importance of the medium of exchange cannot be 
over estimated. We have seen that, through it, by the 
contraction or inflation of its volume, prices fluctuate 
and with them fluctuates the value of our pay check, 
our property and our fortunes. As prices fluctuate so 
fluctuates our standard of living, our comforts, our hap* 
piness and our whole aspect of life. Nothing then can 
be of more importance to us as individuals and as citi- 
zens than this matter of the medium of exchange. 

It is because of the importance of the money function 
that coinage has always been considered a government 
duty and privilege. No privately issued medium could 
gain and hold public confidence. Without confidence the 
medium would not be accepted so it failed in efficiency 
as an exchange medium in the same proportion as it 
lost public confidence. 



BREAKING THE STRANGLE HOLD 131 

History taught the business world that the medium of 
exchange must not only hold public confidence but it 
also taught that a mixed coinage within the same coun- 
try checks material progress just as effectually as the 
confusion of tongues checked the building of the Tower 
of Babel. 

A uniform medium is necessary for commercial devel- 
opment and, therefore, it should have but one source of 
issue and that should be through the government. Be- 
cause of this knowledge, gained through human experi- 
ence, the Constitution of the United States reserved to 
the Federal government the right to coin money. At the 
same time it jealously guarded this right when it denied 
that privilege to the several States. 

Section 8, Article 1, of the Constitution says: "The 
Congress shall have power ... to coin money and 
regulate the value thereof" and Section 10 of the same 
article provides that, "No State shall . . . coin 
money; emit bills of credit; make anything but gold 
and silver coin a tender in payment of debts. " There is 
no other reference to money or to the medium of ex- 
change in the Constitution. 

That, by the foregoing, the framers of the Constitu- 
tion intended to reserve to the Federal government the 
sole right of money issue seems quite plain and the 
general opinion is that our government really does issue 
the medium of exchange. 

We, however, have seen clearly that this is not the 
case. We have seen that while the banks do not "coin 
money" they do issue and control our medium of ex- 
change which is the very function the Constitution by the 



132 THE STRANGLE HOLD 

foregoing provision intends to reserve to the National 
government. 

The proviso that no state shall coin money or issue 
bills of credit makes it quite plain that the framers of 
the basic law intended to reserve the money function to 
the Federal government. Otherwise the proviso would 
reserve only the right to coin the change while the 
banks issue our money. 

If private institutions are permitted to issue their 
credit to be used as a medium of exchange why should 
not the state or the counties or for that matter, the vari- 
ous cities have the same privilege? 

How can government officials justify the present prac- 
tice of permitting private institutions to issue credit to 
be used instead of money in the face of this prohibition 
against permitting the states to coin money or to issue 
bills of credit? 

The state's credit is certainly superior to that of any 
bank, because the state possesses the right to tax the 
bank as well as other property within its boundaries and 
a state's promise to pay is a mortgage on all the prop- 
erty within its confines, including that of the bank. If 
no state may coin money or "emit bills of credit/' cer- 
tainly no corporation, the existence of which depends 
upon state law, should be permitted to exercise this func- 
tion either directly or indirectly. 

It is equally certain that a national bank, being a pri- 
vate institution, has no better constitutional standing 
than the state bank as a source of money issue. The fact 
that it is incorporated under a national law or that the 
medium of exchange it issues is called "Credit" instead 



BREAKING THE STRANGLE HOLD 133 

of money, or coin, or currency, gives it no right to usurp 
an exclusive government function. 

Consequently, it is plain that it was never contem- 
plated by the framers of the Constitution, nor is it now 
intended, that the circulating medium of this country 
should have any source of issue other than that of the 
Federal government. Regardless of these facts and of 
these provisions we find that because of the constant in- 
crease of the banking habit, all of our medium of ex- 
change today, except the small change, is issued by 
private institutions. 

In plain but unmistakable language the constitution 
reserves to the Federal Government alone the right to 
issue money and prohibits the states from so doing but, 
notwithstanding this direct reservation and prohibition, 
state banks as well as national banks are substituting 
their credit to be used as money. 

It has already been shown that this is issued by the 
bankers entirely at their will. In other words, com- 
mercial development has substituted the credit of pri- 
vate institutions for a medium of exchange controlled by 
the government and by reason of this substitution the 
banks have usurped the most important government 
function. It is impossible to reconcile this state of 
affairs with the provisions of our Federal Constitution 
or with common sense. Our present practice then is 
without doubt in violation of the basic law of the land. 

Notwithstanding these constitutional provisions it will 
be shown in a later chapter, devoted to the Federal 
Reserve System, how Congress, through the Federal 
Reserve Act, even went so far as to put the credit of 



134 THE STRANGLE HOLD 

the United States behind the personal judgment and 
private interests of the bankers with the avowed pur- 
pose of turning their credit into government currency, 
thus aiding and abetting this illegal practice. 

Other attempts to use a privately issued medium of 
exchange have been suppressed by the government. In 
those instances the substitutes for money which were 
used had no camouflage to conceal their true nature, so 
they were plainly violations of the constitution and our 
coinage laws. But the fiction by which the banker 
credits the borrower with a deposit has concealed the 
true nature of bank credit and permitted it not only to 
nullify this provision of our fundamental and statute 
law but even to command the aid of Congress in so 
doing. 

No one can be blamed for this state of affairs for it 
comes about because of the general misconception con- 
cerning our money. 

All public officials, however, are sworn to uphold the 
constitution and laws so when this violation is clearly 
shown, as it has been, it now becomes their sworn duty 
to see that the violation of the Constitution is stopped. 

It has already been shown that it will not be a diffi- 
cult task to recover the money function to the govern- 
ment. No court proceedings will be necessary. The 
remedy is constructive not destructive. 

By a few slight changes in existing laws we can 
comply with the Constitution and restore the money 
issuing power to the people. 

We have seen how this result can be accomplished 
by a few simple changes without upsetting the present 



BREAKING THE STRANGLE HOLD 135 

system of banking or changing our manner of doing 
business, and without any risk of political inefficiency or 
of personal loss. 

A few words written into the Federal Reserve Act 
would give the Federal Reserve Board power to define 
the securities on which and the manner in which banks 
may make loans. Since the Federal Reserve Board is a 
government institution, like the United States Mint, our 
medium of exchange would then be issued under Federal 
authority and the constitutional provision for Federal 
control of our money or medium of exchange would be 
satisfied. 

With the Constitution thus enforced, all institutions 
that accept deposits and grant credit including state 
banks and trust companies, should be compelled to be- 
come members of the Federal Reserve system. 

The rules laid down by this public authority would 
then unify our medium of exchange and give public 
control to our greatest public utility. 

Besides such adjustments as would take from the 
banker the arbitrary power to refuse loans for purely 
personal reasons, we should do away with unnecessary 
reserve restrictions and the regulations that prohibit 
national banks from making loans on land. 

With the suggested change in the Federal Reserve Act 
accomplished, the states in self defence would be com- 
pelled to make modifications in their appraisement ma- 
chinery, so as to adjust the assessor's office to the fixing 
of values of property on which loans might be sought 
from the banks. Not a difficult task as has been shown 
and will be shown more definitely later on. 



136 THE STRANGLE HOLD 

The reform should be national because the Federal 
government should control the money function. How- 
ever, it is not necessary to await congressional action. 
It may be accomplished through the state banking sys- 
tem, and, by bringing pressure on the Federal govern- 
through the states, national action will follow. 

Every state has its banking department under one op 
more state officials. We here suggest a model law by 
which any state may take control of the issuance of bank 
credit under the state banking system. 

The state banks would still violate the spirit of the 
constitution, but not in as great a degree as the present 
practice. 

To secure public control of the state banking system 
we suggest as an amendment, which will fit into the code 
of practically any state, the following: 

The State Banking Department shall, and there is 
hereby vested in it, the power to make and publish 
such rules and regulations and define such terms as 
in its judgment may seem wise and expedient for the 
government of all banking corporations, which rules 
and regulations shall be general and shall not conflict 
with any of the laws of this state or of the United 
States; but which SHALL DEFINE THE SECUR- 
ITY ON WHICH, AND THE MANNER IN 
WHICH, SUCH CORPORATIONS MAY MAKE 
LOANS AND INVESTMENTS OR BECOME 
LIABLE ON ACCEPTANCES OR OTHER EVI- 
DENCE OF DEBT: provided, however, that no such 
corporation shall be compelled to make any loan or in- 
vestment, nor become liable on any obligation or other 



BREAKING THE STRANGLE HOLD 137 

undertaking against its will ; nor shall any such corpo- 
ration have any claim against the state banking de- 
partment or a member thereof or against the State for 
any loss which it may sustain because of any of the 
rules and regulations so made and published. It shall 
be the duty of said department at each regular meet- 
ing and at any special meeting called for that purpose 
to examine all reports made by said corporations re- 
lating to their condition, and all reports of regular 
and special examinations made by the state examiner 
and deputy examiners and filed with said department 
during the preceding quarter or such period as shall 
have elapsed since the last meeting of said department 
and to approve or disapprove the same, and to make 
and enforce such orders as, in its judgment may be 
necessary or proper to protect the public and particu- 
larly the depositors or creditors of said institutions. 
Said department and the state examiner and deputy 
examiners shall have the power to subpoena witnesses, 
administer oaths, and generally to do and perform 
any and all acts and things necessary to the complete 
performance of the duties herein imposed, and to 
enforce all of the provisions of this act and for the 
purpose of enabling them to perform all the duties 
imposed upon them, the provisions for such purposes 
shall be held as applicable to their proceedings. Any 
and all orders made by said department shall be im- 
mediately operative and may be enforced by a court 
of competent jurisdiction. §aid department shall 
keep a full and complete record of all its proceedings 
and of all orders made by it, and the records of the 



138 THE STRANGLE HOLD 

state banking department of the state examiners and 
of any and all reports made by or filed with the depart- 
ment or the state examiner, shall, under proper re- 
strictions, during regular business hours, be open to 
inspection and examination. 

The object sought by such a law is to standardize the 
security on which banks may make loans, so as to prevent 
discrimination and also to assure the public that all bank 
loans are made on safe security in order to put full public 
confidence behind the banks and keep it there. 

The essence of the whole matter is but a slight change 
in the present practice and is contained in the first few 
lines, which give the state, through public officials, power 
to make rules denning the SECURITY ON WHICH 
AND THE MANNER IN WHICH BANKS MAY 
MAKE LOANS. 

The only way in which it would be possible for the 
state banking department to profit by the power here 
granted would be by making rules that would be satis- 
factory to both the banks and the people. All rules 
must be general and then must be published, so no per- 
sonal interest in the public control could possibly be 
served. The powers granted the state authorities are 
broad enough to permit them to annul the charter of a 
bank that would persist in refusing loans on personal 
grounds. 

Through public control all arbitrary power would be 
wiped out and each element in the community, by look- 
ing after its own interest, would check up and balance 
the whole system. 

Should the public authority which makes these rules, 



BREAKING THE STRANGLE HOLD 139 

deem it advisable, banks might be left free to loan the 
amount of their unimpaired capital without restriction. 

As a means of explaining favoritism to certain bor- 
rowers bankers have put forth the idea that personality 
enters largely into the making of loans. Some men, 
they say, are worthy of a loan without security. This 
no doubt is true, and since the capital of the bank may 
be looked on as private property, the public authority 
making the rules might, if it thought best, allow the 
banker to exercise his judgment or we should better say 
show his favoritism to the extent of the bank's capital 
but not beyond that. 

As soon as the banker in making loans goes beyond 
the bank's capital and surplus he is trading on public 
confidence and that belongs to the people, so it must be 
treated as public property. 

The values of stocks and bonds are fixed daily by the 
dealings on the stock exchange and of practically all 
commodities by transactions in the various marts of trade 
such as the wheat pit, cotton exchange, etc. 

While real estate values are to a degree fixed by net 
income and occasional sales we must have a sure method 
of fixing such values. 

As explained in the last chapter this object would be 
accomplished by making the assessed value, that is the 
value placed on the property by the assessor for tax pur- 
poses, also the appraised value which the banks must 
accept as the security value. 

The following laws are for the purpose of arriving at 
the true value of all assessable property. By the oper- 
ation of these suggested laws we would not only arrive 



140 THE STRANGLE HOLD 

at a safe basis of security for bank loans, but we would 

put our assessments for taxation on a just and fair basis. 

The two following suggested laws explain themselves : 

AN ACT 
To provide for the hearing of grievances caused by 
assessments for taxation and for appeals from the de- 
cision of boards of equalization and review. 

BE IT ENACTED by the Legislative Assembly of 
the State, etc., or whatever the enacting clause may be: 

Section 1. Any person being aggrieved by the 
return of any assessor of this State may submit such 
grievance in writing to the clerk of the proper board 
for the equalization and review of such assessment not 
later than five days after the regular first meeting day 
of such board; no such statement of grievance shall 
be ignored by said board for lack of form, nor for 
any other reason, provided, it is signed by the party 
aggrieved or by some other person in his behalf, but 
all such complaints shall be taken up and decided by 
the board without delay; should the complainant or 
any other person be aggrieved by the decision of any 
board of equalization or review an appeal may be 
taken by such party by filing a notice of appeal with 
the clerk of said board and the payment to the clerk 
of the required fee within three days after the rendi- 
tion of such decision; when an appeal is taken under 
this section it shall be the duty of said board to sub- 
mit all questions in dispute to a jury of arbitration 
as in such cases provided. 

Section 2. .For the purpose of enabling all boards 



BREAKING THE STRANGLE HOLD 141 

of equalization and review and the clerks of said 
boards to perform all the duties imposed upon them 
they shall have, and the power is hereby given them, 
to subpoena witnesses, call jurors, administer oaths 
and to do and perform any and all acts and things 
necessary to the complete performance of such duties. 



To provide for a jury of arbitration and to regulate 
appeals from the decision of boards of equalization 
and review the following is suggested. 

AN ACT 
To provide for juries of arbitration in assessment 
cases. 

Enacting clause according to the state: 

Section 1. All juries of arbitration in cases where 
an appeal is taken from the decision of any board of 
equalization and review shall be composed, drawn 
and summoned in the same manner as juries in civil 
actions in justices' courts, except that the clerk of the 
board shall act instead of the justice, and for this 
purpose, and to the extent necessary, said clerk is 
hereby given all the power and authority of a justice 
of the peace; provided, however, that for juries of 
arbitration only those persons shall be listed or called 
as jurors who may reasonably be supposed to possess 
accurate knowledge of the value of the kind of prop- 
erty in question, or who are the owners of the same 
kind or similar property in the neighborhood of the 
property under discussion. 

Section 2. Fees in all cases for service on a jury 



142 THE STRANGLE HOLD 

of arbitration shall be the same as in civil cases in 
a justice's court and must be deposited with the clerk 
before the jury is summoned. 

Section S. No person shall act on more than one 
jury of arbitration during any one year, but there 
shall be no other grounds for challenge, except lack 
of knowledge of the value of the property, lack of 
ownership of similar property, bias or undue interest 
in the outcome of the arbitration. 

Section 4. As soon as the required number of 
jurors are selected the clerk shall administer the fol- 
lowing oath: You and each of you do solemnly swear 
that you will render a verdict according to your best 
knowledge and belief. 

Section 5. After the jurors are sworn they must 
sit together and hear the allegations, evidence and 
argument, which must be delivered in public, in the 
presence of the clerk or his deputy who shall conduct 
the proceeding as nearly as may be in accordance 
with the practice of the District court, except that 
the jury shall be given until two-thirty P. M. of the 
day following the close of the hearing in which to 
render a verdict and the jurors shall not be required 
to stay together nor to refrain from talking about the 
matter in hand. 

Section 6. Two-thirds of the jury must agree in 
order to render a verdict which must be in writing 
and signed by each juror agreeing thereto and when 
so signed the verdict must be accepted by the clerk 
and the jury discharged; provided the said verdict 
definitely settles the question or questions submitted, 



BREAKING THE STRANGLE HOLD 143 

and as regards these questions, the verdict so ren- 
dered shall be final, and shall be preserved and 
treated as part of the proceedings of the board of 
equalization and review. 

Section 7. Any juror not agreeing to the verdict 
may have his objections thereto recorded with the 
verdict, and any juror not signing the verdict or 
recording his signed objections thereto shall receive 
no fees or other compensation. 

Section 8. Any jury failing to render a verdict 
within the time specified in this Act shall be dis- 
charged and no fees shall be paid to any of the 
members thereof; whereupon the clerk shall proceed 
to draw another jury without delay and the same pro- 
cedure shall be had until a verdict is rendered. 

Section 9. No verdict nor the objections thereto 
nor any record of the proceedings had shall be added 
to, subtracted from or in any way changed after the 
jury has been discharged. 



Besides the foregoing laws there should be introduced 
into the law prescribing the duties of Assessors a provi- 
sion that, on application of or on an order from the 
owner of any property on the assessment roll, the asses- 
sor shall furnish a "certificate of assessment" in the 
form prescribed by the State or National Banking De- 
partment. A fee may or may not be charged for this 
service. 

While no law which will fit into the code of all of 
the States can be laid down in exact terms, the fore- 
going suggestions carry all the principles which are 



144 THE STRANGLE HOLD 

necessary to put state bank credit under public control, 
and the method of carrying them into effect has been 
fully explained in the last chapter. 

As previously stated, the national banks can be 
brought under public control by giving to the Federal 
Reserve Board the same power over member banks as is 
given over state banks by the first act presented here. 

This can be accomplished by amending the Federal 
Reserve Act as follows: 

To Section 11 of that Act, after the words, "The 
Federal Reserve Board shall be authorized and em- 
powered :" add these words: 

TO DEFINE THE SECURITY ON WHICH, 
AND TO PRESCRIBE THE MANNER IN WHICH, 
MEMBER BANKS MAY MAKE LOANS AND IN- 
VESTMENTS OR BECOME LIABLE ON AC- 
CEPTANCES OR OTHER EVIDENCES OF 
DEBT. 

To fully satisfy the constitutional provision for Fed- 
eral control of the medium of exchange all banks should 
be compelled to join the Federal Reserve system. With 
these two suggestions put into effect each state should 
pass the suggested laws providing for appeals from 
boards of equalization and for a jury of arbitration. 
Practically nothing more is necessary in order to put the 
control of the money function into public hands. 

As the rules governing bank loans would have to be 
published and would apply to all alike, our whole finan- 
citl system would then be unified. Applications for 
loans would be treated on their intrinsic merits without 
injustice or favoritism. 



BREAKING THE STRANGLE HOLD 145 

This object can be accomplished without the least 
upset to business and the improvement in our industrial, 
social and political life which would follow the change 
can hardly be estimated. 

By means of a few words placed in the Federal Re- 
serve Act the basic flaw would be removed from our 
social system; our constitutional rights would be re- 
gained and the last vestige of privilege would be de- 
stroyed. 

We have seen how the use of a commodity, as the 
medium for carrying on exchange, subjects all trade and 
through it the productive energy of the community to 
the will of those who are able to control or corner that 
commodity. 

The use of one commodity as a medium of exchange 
is the basic flaw in our civilization which has hampered 
progress and stood in the way of the peace and happi- 
ness of mankind from the very beginning of civilization. 

It has been shown that when the commodity itself was 
no longer used as a medium of exchange the same condi- 
tion was continued by a promise to pay that commodity. 

When gold could no longer fulfill requirements as a 
medium for carrying on trade there grew up a custom 
of using for that purpose a promise to pay gold. And, 
although this promise has been proved false by panics 
and the many subterfuges used to escape its fulfillment, 
we still cling to it without justification or reason as a 
baby clings to a rattle. 

Through the use of a commodity as a medium and by 
confining credit to a promise to pay that certain com- 
modity the present financial system gives into the hands 



146 THE STRANGLE HOLD 

of those who control that commodity a power over the 
daily life of the members of the community such as no 
political ruler ever possessed. 

This glaring defect in the very foundation of the 
industrial system which supports civilization seems to 
have been overlooked and man in his quest for liberty 
and equality has always directed his efforts against 
political instead of financial rulers. These misdirected 
reforms could not reach the goal of personal liberty and 
equality for they were not aimed at the power that 
dictates personal welfare. 

Mankind has been cheated out of those rights which 
our Declaration of Independence says are inherent and 
unalienable by the financial system and not by political 
government. 

As long as the money function is performed by a 
certain commodity or the promise to pay that commodity 
or as long as the control of credit remains in private 
hands, the success, prosperity and happiness of the mem- 
bers of the community will be at the mercy of the few 
who control that commodity or the credit resting on it. 

This condition has been felt but not logically and 
clearly noted, and resentment, though not clearly defined, 
has given rise to such terms as Financial Oligarchy, 
Moneyed Aristocracy, Plutocrats, etc. 

These epithets have been hurled at the heads of prac- 
tically all men who have been financially successful; 
they are favorite terms with certain would-be reformers 
and the purpose of their use is to excite class hatred. 

It is not the part of intelligence to blame individuals 
for the faults of a system. 



BREAKING THE STRANGLE HOLD 147 

If a flaw in our economic system makes it possible for 
the minority to gratify a natural desire for power at the 
expense of the majority the attack should be on the 
system and not on the men who take advantage of it. 

A slight change in existing laws will cure this defect. 
The improvement in national efficiency and personal 
well-being which would follow the change would be im- 
mediate and most gratifying. 

There would be a decided gain in business freedom 
and productive energy, because the medium for conduct- 
ing business and carrying on industry would be open to 
the use of all. Banks could then grant the long time 
credits necessary to revive our foreign trade. 

In our present system the use of this medium is re- 
stricted both by the private interests in control and by 
the limitations of the gold reserve requirements. 

We might in a measure foresee this improvement by 
noting the change which was brought about by placing 
the railroads under public control through the interstate 
commerce law. This comparison, however, is not a fair 
one for several reasons. 

For instance the medium of exchange is a much more 
important public utility than the railroads and enters 
more intimately into the life and activity of every indi- 
vidual in the community. Every member of the com- 
munity must use the medium of exchange and all are 
directly affected by its fluctuation in value. 

For these reasons then, the abuses due to its private 
control have a much greater effect and are far more 
harmful though not so easily seen as these incident 
to railroad control. Finance is at the base of practically 



148 THE STRANGLE HOLD 

every activity of life. No productive enterprise can start 
or continue without the use of the exchange medium. 

It has been shown here in detail how the fault in our 
system can be removed. To follow out and show the 
changes which would come about through this improve- 
ment in our system is unnecessary. 

It is enough to know that all these changes would be 
for the better. This must follow as a natural result for 
the suggested change puts into effect the principles on 
which our government is founded. 

Liberty and equality are the inherent rights of all 
citizens and neither can exist in a state where any man 
or set of men controls that which others must use. 

Bankers, as a class, are prone to criticise union labor 
and the "closed shop'* as being opposed to industrial 
progress and American principles. But, may we ask, 
if the "closed shop" is harmful and un-American, how 
about the "closed bank"? 

It is quite evident that so long as any set of men 
possess the right to deny to other men the use of that 
which they must use in order to make a living or attain 
success and happiness neither liberty nor equality can 
possibly exist. 

A system which practically compels the banker to 
refuse the use of the medium of exchange to a farmer 
who by every right is entitled to use it and then permits 
that banker to grant its use to the speculator for the 
purpose of purchasing and holding, for profit, the farm- 
er's crop, is contrary to every American principle and to 
the best interests of every citizen. 



BREAKING THE STRANGLE HOLD 149 

That our present system is inefficient, unjust and un- 
American, cannot be denied. 

Almost every economic factor, except the one which is 
the real cause, has been blamed for our present ills such 
as trusts, the stock exchange, wheat pit, profiteering, 
labor unions, politics, etc. But we will see that the fault 
in these factors is really due to the bad effects of a de- 
fective system of exchange. 

It will be shown in later chapters that the so called 
"Trusts," for instance, are not the villains we have 
thought them, but, that practically all the villainy is the 
work of one trust — the "Money Trust" — which has 
finally been located and which will be put out of busi- 
ness when the remedy here suggested is put into effect. 

Industrial turmoil and social unrest are the result of 
the money power holding control over productive enter- 
prise. Apply the "open shop" principle to the bank. 
Open the bank door to all industry and keep it open. 
Stabilize the value of the dollar, and the chasm between 
capital and labor will be bridged. 

In preceding chapters we have definitely located the 
two glaring defects in our financial system — private 
control and a false basis for credit. We have also dis- 
cussed in sufficient detail a remedy which is practical, and 
right in line with American ideas and which completely 
eradicates these defects without disturbing business or 
injuring any one. When this simple remedy is applied 
prosperity will be restored in greater measure than 
was ever before enjoyed and our national efficiency will 
be greatly increased as will be shown in a later chapter. 



150 THE STRANGLE HOLD 

The various attempts which have been made to coun- 
teract the bad effects of these two weak points in our 
system, especially the Federal Reserve Act and the Farm 
Loan Act, can now be reviewed in a different light than 
has heretofore been applied to them. 

The chapter on the Federal Reserve System will war- 
rant special attention for the functions of that institu- 
tion are at present not well understood. It will be 
shown that in its present form it is a decidedly un- 
American institution. 

Some of the mysteries of the New York stock ex- 
change will be cleared up in the chapter on "Specula- 
tion" and "Foreign Exchange" will be explained in a 
chapter under that title. It will be shown that the 
faults existing in these various economic factors will 
disappear when the remedy offered is applied. 

Since the need for reform must be clearly established 
before asking that present conditions be changed the 
chapters immediately following are designed to show 
that need. 

The chapter on "Modern Feudalism" shows how un- 
American our present system is, the one on "Interest" 
shows how unjust and oppressive it has been and can be 
and the "Gold Standard" chapter, by using the words 
of an ex-Secretary of the Treasury shows how extremely 
false it is. AMERICA stands for just the opposite of 
all these and the suggestion here is to Americanize 
America by making our financial system conform to 
American ideals. 



CHAPTER IX 
MODERN FEUDALISM 

EVERYBODY is more or less familiar with the his- 
torical epoch known as the Feudal Era. Every 
school history contains a discussion of it. And so every- 
body will perhaps remember how, in the ancient feudal 
states, the king was supposed to own all the land; how 
he distributed this land among his vassals, lords and 
dukes, and how they in turn divided the land allotted to 
them among their own vassals, the barons and knights; 
and how each in turn acknowledged the authority of his 
immediate master, and rendered services to him. 

Below these various layers of vassalage and snb- 
vassalage were the common people, who tilled the 
soil, and supported the privileged classes, enabling the 
latter to spend their time in feasting, fighting and enjoy- 
ing life generally. 

Such a system was one of a bye-gone era, and one 
that has long passed out of existence; today we are 
supposedly living in an era of individual liberty and 
equality. 

And yet, when one looks below the surface, it will 
be seen — and those who have read this far already see — 
that this freedom is more apparent than real. For 
there exists in our financial system, the most important 
institution of today, a system of feudalism which, while 
less obvious, is thereby the more far-reaching. 

151 



152 THE STRANGLE HOLD 

With regard to the ownership of land, and the con- 
trol of it, the system of feudalism has long passed out 
of existence, but it finds a perfect counterpart in out 
present banking system. 

The head of the feudal financial state resides in New 
York, with headquarters in Wall Street; the dukedoms 
are presided over by the banks of the reserve cities; the 
barons and knights who rule the lesser cities and towns 
are tributary to these financial powers; and just as in 
the old feudal system, the people though no longer called 
serfs, are the subjects of this money power. 

It is true that the old system has been refined some- 
what. The autocrat no longer has the power to chop 
off the physical head of an inferior. Instead he has 
the right only to cut off his financial head. Instead of 
having the right to imprison his serfs, the financial lord 
has the power only to withold from those who displease 
him the means of conducting their business. That is, he 
shuts the bank door in their face and denies them the 
use of the medium of exchange. 

This change is a refinement, perhaps, but it does not 
help to free the serf. For in denying a man the use of 
the greatest public utility, which is the mean3 of car- 
rying on his business, the financial master can cause just 
as much loss and suffering as the old feudal master 
could through a more apparent power. 

Perhaps the newer feudalism has been made less hate- 
ful than the old, since the outward signs and symbols of 
power have been discarded. Names hav^e changed, and 
we no longer speak of king, vassal, and serf. The vis- 
ible means of enforcing the master's will have disap- 



MODERN FEUDALISM 153 

peared, and our financial kings, dukes, and barons do 
not parade in regal costumes and waving plumes. And 
the tokens and customs of serfdom, the forms in which 
the serfs acknowledged openly their inferiority, and the 
supremacy of their masters, are no longer required. 

But for all this, the subjection is no less complete. 
Indeed, on account of its invisibility it is the more 
dangerous; it is the more insidious. For the present- 
day tyrant is no longer responsible to the court of public 
opinion. Because the means of his power are not easily 
seen, and the results of his tyranny will be charged to 
other causes, he can use his power in the most cowardly 
way, and yet escape all criticism. He can, for instance, 
cause a failure in business by withholding deserved 
credit, and then blame the failure to the unbusinesslike 
methods of his victim. And instead of being censured 
for such an act, the tyrant is praised for his foresight 
and wisdom. 

There is yet another way in which thi3 modern feu- 
dalism is a greater burden and a more serious danger 
than was the old. Under the old system the interests of 
master and serf at least tended in the same direction. 
The more the serf produced, the more the master could 
require from him, and so they both desired the greatest 
production. But today the reverse is often the case, for 
frequently the interest of the financial master is allied 
with that of the speculator, and so opposed to that of 
the producer. Some may doubt this, but their doubts 
will be removed in a subsequent chapter, where this 
phase of the question will be more fully discussed. 

Probably some people may resent this entire com- 



154 THE STRANGLE HOLD 

parison; they think it ridiculous and absurd, or at least 
untrue. If they are not convinced after reading what 
the Comptroller of the Currency has to say in the next 
chapter they would possibly change their minds upon 
applying at any bank for a loan. 

Let us suppose a man applies at his home bank for 
a loan. Such an application would be a request to be 
allowed to use the most important public utility. The 
first question he would be called upon to answer would 
be: "What are you going to do with the 'money* ?" So 
customary has a question of this sort become that it 
seems now perfectly natural. But when one thinks 
about it a little, and sees what an assumption it makes it 
will be resented. For does it not assume the relation- 
ship of master and servant? Or at least that of guard- 
ian and ward? 

Where the security is not of the best, so that the loan 
must be applied to that security in order to make it 
good, the question is logically justifiable; but where a 
man is offering ample security for the use of the medium 
of exchange, the banker has no right to inquire into 
his business. Under such circumstances the question is 
virtually an insult, for it assumes that the banker is the 
master or at least the guardian of the customer. 

It is cheerfully admitted that neither the banker's 
question, nor his refusal to make the loan, are prompted 
by any feeling on his part of that of a master toward a 
servant, but this in effect makes no difference, for the 
result is the same. 

Our analogy is also borne out by the fact that the 
answer of a baron — the small banker — when asked for 



MODERN FEUDALISM 155 

a loan, will depend very much upon how his overlord, 
the reserve city banker, feels toward business conditions 
and the future outlook; the latter's conclusions are in 
turn drawn from the head of all national financial power, 
otherwise known as "Wall Street." 

In short, is there any practical difference between a 
system where the master owns the land, and permits his 
serf to work it under his direction, and one in which the 
master controls the medium of exchange, which must be 
used by the producer to carry on his business ? 

The feudal master controlled the basis of all industry, 
the land, while the modern master controls the means of 
carrying on all industry, the medium of exchange. 
Is there any difference? 

Perhaps this comparison of our modern financial sys- 
tem to the feudal system of bye-gone days is liable to 
become tedious with too long a discussion, so with one 
more picture we will turn to further direct considera- 
tions. 

An old historian saw the evil effects of the old system 
of feudalism, whereby one class worked in order to sup- 
port the other in idleness; and, in order to show this 
evil the more clearly, he drew a picture to represent the 
conditions of the day. In this picture he showed the 
king standing on the shoulders of his overlords these 
overlords stood on the shoulders of their lesser lords, 
who in turn stood on the shoulders of their own vassals, 
the minor landholder; finally these stood directly on the 
back of the poor peasant or serf, who tilled the land, 
And so in addition to his work in tilling the soil and 
bringing forth a produce from it, the serf had to bear 



158 THE STRANGLE HOLD 

the burden of all these successive lords and overlords, 
and the sovereign himself, upon his shoulders. Nat- 
urally such a weight bore him down, so that he could not 
even cultivate his fields properly. 

The force of this picture was to show how the old 
system, by placing all the weight upon the one class of 
producers^ tended to restrict the production of this class 
itself. Precisely the same thing applies to our modern 
financial feudalism. The entire weight and restriction of 
a bad financial system rests upon the shoulders of the 
producers, and hinders them, so that they are unable 
to carry their production even with reasonable closeness 
to its fullest development. 

Since the object of civilization is to provide for the 
wants of the community with the least effort on the part 
of the members of the community, our present system is 
directly opposed to the advancement of our civilization. 

It is true that the individual banker cannot be blamed 
for the difficulty the producer has in obtaining proper 
credit; the fault is with the entire banking system. But 
this does not lighten the gravity of the fault, nor remove 
its bad effects. 

The weakness of the system is shown when two dif- 
ferent institutions had to be erected in an attempt to take 
care of the farmers' need for credit. The Federal Farm 
Loan Act is but one indictment of the inadequate, ineffi- 
cient, and antiquated banking system that hinders the 
forces of agriculture, industry, and commerce today. 
The War Financing Corporation and the Edge Act are 
recent indictments to the same effect. 

And one of the chief phases of this inadequacy lies 



MODERN FEUDALISM 157 

in the autocratic power of the banker which has been 
the subject of discussion in the preceding pages. This 
autocratic power is sometimes exercised very ruthlessly. 

For instance, the lords of finance recently discovered 
that credit inflation had caused extravagance. Even 
working men were spending their money for automobiles. 
Word was sent out that the credit situation demanded 
curtailment. It was not an order; it was no more than 
a suggestion, but no king's command could have been 
more promptly obeyed. Credit was withdrawn from 
the automobile dealers. As a result, sales contracts had 
to be discounted through speculators at 15, 20, and 25%. 
Orders for machines were cancelled. The automobile 
business slumped and started our present business de- 
pression. It was blamed to over-production, but it was 
not over-production, for the demand had not been over- 
satisfied. It was just the result of the automobile deal- 
ers having been thrown out of the bank. 

The question is now whether we shall erect a financial 
asylum for them as we did for the farmers, and as is 
being done for the exporter, or whether the problem 
shall be solved in a logical, proper, and thorough way, 
through public control of bank credit. This question 
does not concern financial outcasts alone, for we are all 
losers by the business depression and besides, no one 
knows where the axe will fall next. 

No personal liberty can exist so long as any public 
utility so vital as the medium of exchange is allowed to 
rest in private hands. The bad effects of private con- 
trol of a great public utility were quite apparent in the 
old days of unregulated railroad operation, when the 



158 THE STRANGLE HOLD 

officials could show, and use, their authority by refusing 
the shipper a car, or by charging an exorbitant rate, or 
by giving a competitor a rebate, or using any other 
means of unfair discrimination. The power of the auto- 
cratic railroad official was then easily seen, and when 
the evils in the private control of that public utility 
became so obvious, it was soon done away with. 

The chains by which the banker binds us are invisible, 
and our rulers assume no apparent regal prerogatives y 
we are, therefore, lulled into believing that we have a 
freedom such as no people ever before enjoyed. How 
the real state of affairs differs from this apparent state 
is so obvious now to the reader that it needs no repeti- 
tion. 

If these evils were unchangeable, if the private control 
of our medium of exchange could not be done away with, 
if we were destined forever to live and carry on our 
businesses under the autocratic supervision of the finan- 
cial powers, it would be of no avail to point out the 
truth. It would be better for us to blind ourselves to 
the real facts of the case, and to live on in our apparent 
freedom, suffering its evils patiently. But it can be 
changed, and we have seen how easily the change can be 
brought about. 

The American people will certainly not permit this 
strangle-hold on liberty and on all productive energy to 
continue when they know that thirty words properly 
placed in the Federal Reserve Act will completely de- 
stroy the feudal power of the "Money Trust." 

It will not be difficult for business men to conceive of 
the advantages that would accrue to them from such a 



MODERN FEUDALISM 159 

change. By it they would be enabled to carry on their 
business without being compelled to accept the judg- 
ment and yield to the will of the banker. Such a con- 
dition would be so foreign to present conditions that the 
relief can hardly be imagined. Indeed, the thought of 
being able to ignore the banker while using the bank's 
credit is so inconceivable that it may even cause the 
reader to doubt whether the proposed change is prac- 
ticable. And yet it is, essentially practicable, and ex- 
ceedingly simple to carry out, as a review will show. 

The proposed measure would in essence only require 
the banker to extend the use of the public utility in his 
hands to anyone who would have a right to use it — 
that is, to anyone who could give proper security for 
a loan. 

With such a change accomplished every business man 
could know at all times his limit of credit. He would 
certainly appreciate the right of being able to use his 
credit when and as he pleased and to conduct his busi- 
ness according to his own judgment without question or 
hindrance from any one. And this improvement in 
business conditions would all be accomplished through 
public control, which is our present method of dealing 
with all other public utilities. 

There is no suggestion of a change in the kind of 
money, the institution which issues it, or the method of 
using it. 

For if a banker today were going to make a loan on 
personal property such as wheat, iron, hides, wool, etc., 
he would accept as the value the price established by the 
market where such goods are sold. No change in this 



160 THE STRANGLE HOLD 

method is suggested. The only change desired is that 
all must be treated alike by the banker. If one thou- 
sand bushels of wheat is good security for a loan of one 
thousand dollars to Jones, then it should be good security 
for a loan of the same amount to Smith; and the way 
the banker feels personally toward either Jones or Smith 
should make absolutely no difference. 

In the case of a loan on land, no change is suggested 
except one in the method of appraising its value. 

Instead of letting the banker or a bank appraiser 
guess at the value and charge a good sum for the guess, 
it is suggested that we make the personal interest of 
the property owners of the community settle the value 
through the Assessor's office in a simple and practical 
way with little or no expense to anyone, but with perfect 
safety and satisfaction to all. 

These few changes are simple and obvious but once 
they are made any business man may know at any time 
how much he is entitled to borrow from the bank. He 
would merely have to find the value set on his property 
through these public agencies; then by applying to that 
amount the percentage of loan to value established by 
the state banking authority or the Federal Reserve Board 
he would know exactly what amount he could borrow. 

For instance let us suppose a manufacturer desired to 
buy a thousand tons of iron. The iron, we will say, is 
quoted at $60 a ton, and the percentage of loan to value 
established on such a security is, say, 70%. The thou- 
sand tons would cost $60,000. When put in a warehouse 
the manufacturer would be entitled to borrow on the 
warehouse receipt 70% of $60,000 or $42,000. Then 



MODERN FEUDALISM 161 

to swing the deal he would only require of his own cash 
$18,000 and enough to pay the freight. 

There would be no guess-work about this deal, no 
time wasted, no humility, no pandering to the banker. 
He could figure it all out in his office and then wire his 
order. When the iron was shipped he would deposit 
with the bank his note for $42,000 with the bill of lading 
attached, and with this loan, plus the $18,000 he already 
has, he pays cash for the iron, and is thus enabled to 
take his discount or the transaction could be handled 
through an acceptance. 

Similarly a merchant who might want to buy a thou- 
sand barrels of sugar, or other merchandise, could do it 
in the same way, and without any uncertainty or worry 
either for himself or the banker. 

Since the use of the medium of exchange would be a 
right which he could always take advantage of, so long 
as the value of the security given did not fall, these 
notes could be renewed indefinitely. The only requisite 
would be that the margin of security be maintained and 
the interest paid. 

Such a procedure would probably seem strange for 
business men. They would feel unaccustomed to their 
new freedom, and hardly be able to realize that they 
could go ahead without telling all their business plans 
to the banker and then worrying whether he would let 
them have the money. But the habit of deferring to 
the banker would be overcome in time, and we would 
gradually learn to get along without a guardian. And 
what a relief it would be! Especially in the knowledge 
that the banker would have to renew the note as long as 



162 THE STRANGLE HOLD 

the security were kept at the required margin and the 
interest paid when due. 

As to the right or wrong of the proposed change, the 
right is entirely on the side of public control. For bank 
credit has gained its position as our medium of exchange 
only through the laws which the people make. Through 
our laws the banker is enabled to exercise a function 
which properly belongs to the government. 

Instead of the proposed change taking any property 
or any rights from the banker it is just the reverse. 

The banker is a trespasser on the peoples' rights. 
Through the development of the banking habit, aided by 
our banking laws, the banks have usurped the most im- 
portant government function, that of money control. 

There is no more reason for allowing the banker to 
continue this trespass than there would be for permit- 
ting any body of private citizens to move into one of 
our public buildings and use it for their own purposes 
to the exclusion and detriment of the public. 

There is not the slightest justification for our present 
banking system nor any reason why the banker should 
continue to be our lord and master, and so there can be 
no possible objection to the proposed change as a matter 
of principle. Indeed, the very opposite is the case. 

For since it is through our laws that bank credit has 
become our greatest public utility, and since its value is 
derived entirely from those laws, it is not only our right, 
but our bounden duty, to put it under public control. It 
is public property. It belongs to the people in common 
and, therefore, it must be at the service of all on the 
same terms. 



CHAPTER X 
INTEREST 

There may still remain some among those who read 
these pages who doubt the validity of the indictment 
contained in the preceding chapter. Perhaps they feel 
that nothing sufficiently official or authentic has been 
cited to prove the case. 

If this be so then their doubts will scon be dispelled 
in the succeeding few pages. Here they will find indis- 
putable evidence of the feudalistic power now in the 
hands of our present day masters, the banking interests, 
and of the ruthless and destructive way in which the 
power has been and still is exercised.* 

This evidence is to be found in recent reports of Mr. 
John Skelton Williams, Comptroller of the Currency of 
the United States. Were it not for his official position 
and the sound facts which called them forth some of his 
statements would sound like the ravings of a soap-box 
reformer or the scare-headlines of a propagandist jour- 
nal. Coming as they do, however, from such an authori- 
tative and responsible source, they cannot but be accepted 
as authentic. 

Among the most recent of these is a statement given 
by the Comptroller to the press — a statement which, as 
would be expected, raised a howl of vigorous protest. In 
this statement Comptroller Williams exposed the fact 



*See Appendix Page 302. 

163 



164 THE STRANGLE HOLD 

that the rates for call money used by New York banks 
are fixed by a committee of brokers on the New York 
stock exchange. Among the evils resulting from this 
practice he pointed out the fact that since the rate on 
call money affects prices, especially the prices of bonds 
and stocks, the committee is thereby enabled to deter- 
mine the trend of prices and to quickly effect the prices 
of securities. Having in this way an "inside" knowledge 
of how security prices are going to move, or rather, 
being thereby enabled to influence the movement of these 
prices, this committee of brokers has the opportunity of 
profiting largely, and without risk, by operations on the 
stock market.* 

Glaring as such a fault is, however, it is only one of 
the lesser evils that result from this improper concen- 
tration of power in the hands of a few. The Comptroller 
pointed out a still greater obj ection to the practice in the 
fact that, by raising the rate on call money in the finan- 
cial center, money which otherwise would be used to 
stimulate legitimate business and to foster production 
in other parts of the country would be attracted to New 
York and used for speculative purposes. In this way 
the practice resulted in defeating one of the primary 
purposes of the Federal Reserve Act, namely, the orderly 
distribution of money throughout the country to meet 
the needs of commerce and agriculture. 

As was to be expected, this statement of the Comp- 
troller raised a vigorous storm of protest from the 
bankers. For doing his duty in pointing out a very 
glaring defect in our financial system, Comptroller Wil- 



*See Comptroller's statement printed in the Appendix. 



INTEREST 165 

liams was severely taken to task at the meeting of the 
American Bankers Association which condemned his 
plain statement of facts, as a "dangerous attack on the 
credit structure of the country." 

If any comment is at all necessary here, it will be 
sufficient to remark that, to an impartial observer, such 
a condemnation indicates a very tottering condition of 
the country's credit structure. If our banking system is 
so shaky that a plain statement of what any one will 
readily recognize as a very harmful and eminently unjust 
practice, can be called "a dangerous attack on our credit 
structure" it is about time to put that "credit structure' 
upon a more solid basis. 

The solicitation of those bankers for the safety of 
our credit structure may have been influenced somewhat 
more by personal interest than by patriotic motives. It 
has been a rather common practice for the masters of 
all ages to appeal to fear of national calamity or to hide 
personal interest behind patriotic motives in order to 
save their privileges. 

Indeed, if the foregoing statements have such dan- 
gerous possibilities, what must have been the danger of 
other statements made by the same Comptroller, at an 
earlier date. For not so very long ago the Comptroller 
had occasion to call a number of banks to order for prac- 
ticing usury. The idea of usury is generally connected 
with the Middle Ages, when the exaction of any interest 
at all on loans was unlawful; and where the money- 
lenders, running as they did the risk of extreme punish- 
ment, charged excessive rates to make up for the danger. 

In the minds of most people, then, the practice of 



166 THE STRANGLE HOLD 

usury is thought of as being one of the abuses of the 
Dark Ages, together with such things as the Spanish 
Inquisition, The Star Chamber, and so forth. The facts, 
however, are far from this. For not merely a few banks 1 
but more than one-third of all the national banks in the 
United States were convicted on their own sworn state- 
ments of charging usurious rates of interest, running, in 
some instances, as high as two hundred per cent a month, 
or more than two thousand four hundred per cent per 
annum. 

Certain parts of the reports of the Comptroller of the 
Currency are so interesting that they are well worth 
being reproduced here. 

In regard to the City of New York, the financial 
center of the country, the Comptroller of the Currency 
said: 

"It is the walled city from which the barons have 
levied tribute on a territory and population vaster 
than any king of the Middle Ages dreamed of, yet 
sometimes using methods as ruthless and savage as 
those of the robber nobles . . . forays and levies 
devasting by scientific, artful methods ; pillaging under 
form of law, smiting with swords that bite deep, 
though we can not see them, consuming with fire which 
comes invisible and unsuspected." 
Does anybody need a stronger confirmation than this 
of our indictment of the present financial system as 
being a stronghold of feudal power and practice? 

To proceed with the Comptroller's statement, he claims 
that "there is no natural limit to greed and the ambition 
to acquire/' offering as proof thereof the following: 



INTEREST 167 

"Sworn reports, made by the banks themselves, 
show that on September 2, 1915, 2,743 national banks, 
out of a total of 7,613, were guilty of usury. This 
at a time when the Federal Reserve banks were offer- 
ing money freely to national banks in every part of 
the country at rates varying from three and a half 
to five per cent. 

"Such a policy is bad and dangerous, even in the 
business centers where borrowers are men of experi- 
ence and skilled in business, but the real brutality and 
horror of it develops in the rural districts. Some 
reports from the South and West, the Northwest and 
the Southwest, are blood-curdling. They are like 
stories from darkest Russia; like the ghastly wrongs 
done the French country people by the old nobility. 
The small farmer or planter is usually poor and with- 
out money to employ lawyers or the instruction to 
understand his own rights. Because of this helpless- 
ness, he fails an easy victim to the rapacity of the 
unscrupulous money lender, and goes to a destruction 
that his energy and honesty do not deserve." 
Nor is this merely an empty indictment, unsupported 
by direct proof. In support of his statements the 
Comptroller gives a few typical examples which are 
interesting if for no other purpose than to prove that 
greed has no natural limits. For instance he says: 

"I have the record of the loans made by one Texas 
national bank to a hard-working woman who owned a 
little farm a few miles from town. She borrowed, in 
the aggregate, $2,375, making about thirty loans dur- 
ing the year. Listen to the details of the robbery: 



168 THE STRANGLE HOLD 

$162.50 for SO days at 36 per cent: $377 for 34 days 
at 44 per cent; $620.25 for 23 days at 77 per cent; 
$11 for 30 days at 120 per cent; $21.50 for SO days 
at 90 per cent; $33 for 2 days at 93 per cent; $27 for 
15 days at 195 per cent; $110 for SO days at 120 
per cent — that was to buy a horse for her plowing — 
$20 for 48 days at 187 per cent; $6 for 10 days at 
720 per cent; $7 for S days at 2,000 per cent; and so 
on; every cent paid off by what sweat and struggle 
only God knows." 

As an exceptional instance, this statement might not 
be of such overwhelming concern, since the loans were 
small. But it is not an exceptional instance. In that 
state alone 192 banks out of 534 were found guilty of 
usury, charging all the way from twelve to two hundred 
and fifty per cent on the money they could get from the 
Federal Reserve Bank for from three and a half to five 
per cent. 

Another instance cited by the Comptroller is equally 
interesting: 

In Oklahoma, where the legal rate of interest is 
six per cent, with ten per cent as the maximum under 
special contract, harassed farmers paid all the way 
from 12 to 2400 per cent with 40 per cent as the 
average. In the case of one bank, Mr. Williams 
proved that not a single solitary loan had been made 
under fifteen per cent. He cited one particular case 
that he asked to be regarded as typical. In the 
spring the farmer went to the bank and arranged for 
a loan of $200. Out of his necessity he was compelled 
to pay 55 per cent interest charge. Unable to meet 



INI ;EST 169 

the note at maturity, he had to agree to 100 per cent 
interest in order to get the renewal. The next renewal 
forced him up to 125 per cent. For four years the 
thing went on, and all the drudgery of the father and 
the mother and the six children could never keep down 
the terrible interest or wipe out the principal. As a 
finish, the bank swooped down and sold him out; the 
wretched man, barefoot and hungry, went to work 
clearing a swamp, caught pneumonia and died; the 
county buried him, and neighbors raised a purse to 
send the widow and children back to friends in Arkan- 
sas. 

That such a condition of affairs should exist in this 
twentieth century of enlightenment would not be believed, 
were it not for the authenticity of the source from which 
the information comes. But what is still more surpris- 
ing is the fact that this charging of usurious interest 
rates does not comprise the sum total of the abuses. For 
while the Comptroller has stopped the particular abuse 
we have discussed so far as lay in his power to do so, 
and while no national bank has since dared to report a 
usurious interest charge, the abuse has not been done 
away with entirely. For the banks have several other 
ways of "beating the game" and achieving the same 
abusive results, regardless of Comptrollers or of state 
authorities. 

One of these, for instance, is where the banker directs 
an unsuccessful borrower to a broker. For instance, 
when a borrower appears, the banker either demands a 
bonus, or gives some reason why he cannot handle the 
loan. Pretending, however, to be desirous of helping 



170 THE STRANGLE HOLD 

the customer, and hiding his deceit under the mask of 
friendship, he refers the would-be borrower to a broker 
who, he says, may be able to secure the loan from out- 
side parties. Of course, there will be a little brokerage 
fee of from two to five per cent, and the money-lenders 
want a little higher rate of interest than the banks. 

Flattered by the banker's interest in his welfare, the 
helpless borrower takes a card to the broker. The latter, 
really a stool pigeon, goes into the back door of the 
bank and secures the funds with which to make the loan. 

The advantages of this method are apparent. The 
bank escapes the odium of usury. The official who turns 
the trick does not have to divide his rake-off with the 
stockholders of the bank in which he is employed. And 
the borrower's resentment is turned against the stool 
pigeon instead of the banker. High class bankers no 
longer consider this method "ethical," and they do not 
practice it. This makes little, if any difference, however, 
for they have an "ethical" method of putting on the 
screws. This is by requiring the borrower to keep his 
balance at a certain figure. 

If the borrower gets a loan of ten thousand dollars 
it is with the understanding that he is to maintain a 
balance in the bank of from two to four thousand dol- 
lars. That is, the borrower is required to keep from 
one-fifth to one-third of the amount he borrows always 
on deposit in the bank; so if he really needs seven thou- 
sand dollars he must borrow and pay interest on at 
least ten thousand which, of course, raises the rate on 
the money actually used and what appears to be six per 
cent money is really nine or ten per cent money. 



INTEREST 171 

This practice is considered perfectly "ethical/* and 
it is so common that bankers have evolved a rule by 
which they figure how much a man is entitled to borrow. 
The basis of the problem is the average monthly or 
yearly balance the borrower has carried in the bank 
and the answer is about four or five times that balance. 

Thus a business man who has carried a bank balance 
of $2,500, paying interest out of his own pocket on any 
loan, while his balance lies there idle, not drawing a 
cent of interest or at best a low rate of interest, would 
be figured as good for a loan of about $10,000. If his 
balance were $5,000, then he might get a loan, on the 
basis of this larger balance, of $20,000 or perhaps more. 

These are a few of the methods by which our modern 
feudalistic masters grind out their wealth from the toil 
of their serfs. Can anyone still doubt the claim that we 
are living under a modern autocratic regime that is 
rather more than less dominant, ruthless, and terrible 
than that of former ages? 

When we read of the grinding taxes imposed upon the 
common people hj the autocratic government of the 
Bourbon Kings of France, we wonder more at their 
long patience than at the result of their final despera- 
tion, which ended in the Reign of Terror. The people 
of those days were no different from what they are now. 
There were good and innocent Frenchmen among the 
aristocracy who protested against existing injustices, and 
there were high-spirited, intelligent and liberty loving 
people among the down-trodden commoners; but a cour- 
ageous and intelligent peasant remained helpless against 
tyranny, because his neighbors lacked the force to assert 



172 THE STRANGLE HOLD 

their rights and the courage to organize. The peasants 
who would have started an uprising were bound by the 
inertia of the others. Constant pressure of wrong finally 
overcame this inertia and the righteous wrath of the 
people was finally kindled into an all-consuming flame 
which spared neither innocent nor guilty among the 
governing class. 

If this bit of history teaches anything, it is that the 
crime of one of a class, or an injustice to one of a class, 
in the exercise of a public function, is the crime of all 
that class, and an injustice to all of the other class. 

And from the statements it will be seen that even if 
we are not personally and directly affected by the abusive 
practices current under our present financial system, we 
are, nevertheless vitally concerned. Whether or not we 
are, individually, affected by a particular act at a par- 
ticular time, we are at any rate greatly concerned in an 
indirect way. For if the weeds of greed, injustice, and 
oppression are permitted to grow at all, their seeds will 
soon produce more and more weeds, and the whole garden 
will soon be ruined. 

The few illustrations given by the Comptroller serve 
to show that autocratic power in modern America has 
the same tendency toward cruelty, injustice and disre- 
gard of the rights of others that it had in France prior 
to the French Revolution. 

And this is not all. For it is not the flagrancy of 
the cases cited, nor the question of whether few or many 
suffer, that is of greatest importance. Essentially it is 
a matter of principle. The greatest evil lies in the fact 
that the system allows of such abuses. And this is not 



INTEREST 17S 

modified by the fact that the particular abuse has, to a 
great extent, been allayed. For its correction was an 
accident. It happened as a result of the appointment 
of an efficient, and fearless Comptroller of the Currency. 

In fact, the matter of interest, and all the abuses 
which we have seen are possible, and have existed, under 
the present system of banking are really only of minor 
concern to us. For evil as are their effects, they arise 
from a condition which is in itself merely the effect of a 
still more vital evil, the fault that lies at the heart of our 
financial structure. 

This is, once more, the private control of the greatest 
of all public utilities, the medium of exchange. This 
private control is the root in which all evils, such as 
we have been discussing, and others too countless to 
enumerate, find their origin. And these and other abuses 
will be continued, and will forever crop out in new and 
terrible forms, regardless of all governmental restraint, 
however well-intentioned, that is aimed at the effect and 
not at the cause. 

These and many other abuses can be prevented only 
by removing their cause. The whole matter of interest 
or discount, excessively injurious as it may be, is but 
a matter of minor importance. The real concern is the 
matter of private control, from which all the other evils 
spring. 

And once more it can only be said that the marvel is 
not that the evils are so great, nor that their effects are 
so far reaching, as it is that they are allowed to exist at 
all. It is so apparent that our medium of exchange is 
merely a system of keeping track of credits and that the 



174 THE STRANGLE HOLD 

whole system rests on the people's laws and is, therefore, 
the people's property that our present system seems a 
slur on American genius and business ability. It is also 
so plain that it is our greatest public utility, that it seems 
incredible to see the American people submitting to 
tyranny and abuse due to its private control. Especially 
is this so when the remedy for all these evils is such a 
simple one. Thirty words to be added to the Federal 
Reserve' Act, would do away with the rottenness at the 
core of our present commercial and industrial structure, 
and thereby kill off all the weeds and cankerous growths 
that find their origin in that festering center of unre- 
strained private control. 



THE GOLD STANDARD 
CHAPTER XI 

When we read of the misguided individuals who, in 
past ages, believed in witchcraft and sorcery, who wor- 
shipped idols, and who fanatically killed each other in 
the name of religion, we are inclined to pity them. We 
look down upon these former ages from our heights of 
enlightened opinions and our great scientific and mate- 
rial progress, and congratulate ourselves that we have 
become emancipated from ancient and ridiculous beliefs. 

And yet at the same time we have in one metal an 
idol which we worship with no less intensity than did 
the people of past ages worship their graven images. 
An idol, furthermore, which is raised on grounds no less 
fallacious than the idols of old; but one, the worship of 
which is far more destructive in its effects upon the real 
progress of the world than were all the heathen creeds 
and practices of all past ages. 

This idol is gold, and the pedestal on which it is 
raised is the fallacy of the gold standard. It rests upon 
the idea that there is an essential difference between 
gold and all other things, a difference which gives this 
one thing, gold, certain peculiar properties by which it 
has certain power over all other things. 

The subject of the gold standard is mentioned here 
with the intention of divorcing the human mind from 
these ideas. In the suggested remedy^ no mention has 

175 



176 THE STRANGLE HOLD 

been made of the gold standard or of anything connected 
with it and none is necessary. For, as the remedy rests 
upon the foundation of truth all means used to deceive 
and, all false standards will automatically disappear. 

The United States, as well as all other progressive 
countries, has adopted the gold standard. Our finances 
are said to be on a gold basis, meaning that our currency 
is based on gold as the money of ultimate redemption. 
Now to a certain very limited extent this statement may, 
guardedly, be taken as true. Unless, however, it is taken 
in this very limited sense, it includes such a multitude of 
untruths that it becomes the foundation of a very great 
fallacy. 

For it leads to the belief that gold is somehow above 
all other commodities, and by its very nature in a posi- 
tion superior to them. Whereas in truth gold is a com- 
modity, just as lead and iron are, having certain peculiar 
characteristics of its own, as every other commodity has; 
but differing in essential principle not a whit from any 
other commodity. For it obeys the same natural laws, 
from the law of gravity to the laws of value and price. 
Without entering here into a discussion of the various 
theories of value and price, it will be sufficient to explain 
this statement as meaning that gold, just as every other 
commodity, has a real, or true, value, which varies 
according to certain natural phenomena, including de- 
mand and supply. Just as, roughly speaking, demand 
and supply determine the real value of any other com- 
modity, so they determine the real value of gold. 

The truth of this is somewhat obscured by reason of 
the fact that gold, having been used as money for many 



THE GOLD STANDARD 177 

centuries, has had its price fixed by law. That is, the 
weight and fineness, or the amount of pure metal, to be 
put into various gold coins, has been fixed and these 
coins have been designated as of a certain value. The 
significance of this fixed price is, therefore, that it prac- 
tically assumes that gold is the standard of value. 

It is a standard in so far as the prices of other com- 
modities are quoted in or referred to its price, but as its 
price is not stable it is not a real standard. History 
testifies that it has been necessary to readjust the fixed 
price of gold many times within the past six hundred 
years. If gold were in itself the standard of value, 
these changes in its price could hardly have happened. 

Furthermore, the use of gold for other purposes than 
its employment as a money metal — that is, the use of 
gold in the arts shows, in its effects upon the gold coin 
in circulation. The real value of gold varies according 
to the demand for and supply of it. The price of gold 
as fixed by law in the United States today stands at 
$20.67 per ounce. If the production of gold should fall 
off very greatly, so that the needs of goldsmiths, jewel- 
ers, and dentists could not be adequately supplied, these 
people would be willing to pay more for it. That is, 
its market or bullion price would rise. Suppose it rose 
above the money price, say to $22 an ounce. Then gold 
as bullion would be more valuable than gold as coin, and 
coins would be melted up and disappear from circula- 
tion. 

Again, gold always seeks the country where the de- 
mand is greatest^ where people are willing to pay the 
highest price, that is, give up the most goods, for it. 



178 THE STRANGLE HOLD 

All these facts go to show that the real value, and, 
therefore, the true price, of gold fluctuates according to 
the supply of and demand for it, just as does the price 
of every other commodity. Consequently the effect of 
fixing the price of gold at one dollar for 25.8 grains of 
gold nine-tenths fine, at the mint, is no different in 
principle from the effect of fixing the price of wheat at 
two dollars a bushel in Chicago, or the price of iron at 
four cents a pound in Pittsburg. 

It is the fallacy, however, that there is a difference 
between gold and other commodities, a fallacy which has 
endured throughout the ages, and that has been the cause 
of countless unfortunate misunderstandings. And these 
misunderstandings will continue to exist until the fallacy 
has finally been done away with. 

The origin of this fallacy is not hard to find. It 
arose because of the peculiar fitness of gold to be used 
as a medium of exchange at a time when commerce was 
still small enough not to be restricted by its use. For, 
as will be remembered, to render efficient service a 
medium must have universal acceptability and proper 
elasticity. Gold has universal acceptability, and conse- 
quently, so long as commerce did not grow to such pro- 
portions that the lack of elasticity of the gold supply 
hindered its development, gold formed a fairly good 
medium of exchange. As a result of this acceptability 
and because its value fluctuated the least of all com- 
modities, gold came into universal use as a medium, by 
which value is measured and goods are exchanged. It 
was but a short step — however fallacious, to attribute to 
gold the attributes of money (as distinct from the 



THE GOLD STANDARD 179 

medium of exchange) ; that is, to regard gold itself as 
the standard of value. 

And bound up with this fallacy, in that it depends 
for its existence upon the gold standard, is still another 
fallacy, namely, the assertion that gold is the money of 
ultimate redemption. This fallacy, as we have seen, 
arose through the development of credit as a super- 
structure on a medium of exchange composed largely 
of gold, the purpose being to supply the lack of elas- 
ticity from which gold suffers. 

Now it is true that a balance of trade is sometimes 
settled in gold. For instance, if the United States sends 
to England meat, raw cotton, and wheat greater in value 
than the fabric and textiles England sends to us, then 
the difference may be settled in gold, since this is a 
universally accepted medium. 

But the statement that gold is the money of ultimate 
redemption is a different proposition. It means that all 
the currency of the United States, including gold and 
silver certificates, silver and fractional coins, may be 
exchanged for gold at the United States Treasury at 
the option of the holder. It means, too, that bank de- 
posits and other debts are payable in gold. 

Now, as already stated, this is true in a limited sense 
only, that is, so long as too many persons do not try to 
avail themselves of the promised exchange at the same 
time. For if the people should attempt to make the 
exchange in any great quantity as they have several 
times in the past the promise would be found to be 
entirely a fiction. Since the days when gold was really 
used as a medium of exchange, instead of a phantom to 



180 THE STRANGLE HOLD 

bolster credit as it is now used, the volume of trade or 
business has increased many fold, while the increase in 
the amount of metal has been entirely inadequate. And 
now with the amount of gold practically a fixed quantity, 
while the volume of credit is piling up every day, the 
percentage of ultimate payment money to bills payable 
will soon reach the vanishing point. 

The history of finance is largely a list of the various 
deceits and devices that have been used to cover the fact 
that the promise to pay in gold could not be fulfilled. 
Its path is strewn with the wreckage of government 
paper money issues, asset currencies, greenbackism, 
bimetalism, and a varied assortment of banking systems 
and legislation induced by bank failures and panics. 
Altogether it is a sorry story, filled with miseries and 
repeated failures, all due to a lack of understanding of 
basic principles and of the first requisites of a medium 
of exchange. 

But regardless of the amount of trouble that this 
fiction of ultimate gold redemption has caused, it is really 
only a minor point. It is one of the excrescences of the 
real evil at the bottom of all evil which is the private 
control of our medium of exchange. As has been shown, 
the gold standard merely intensifies this evil. Since the 
promise to redeem in gold cannot be fulfilled, it need not 
be considered, in arriving at an intelligent solution of 
the financial tangle. It is necessary, however, that the 
solution shall so completely eradicate the basic evil that 
the resulting fallacies will also disappear. As has re- 
peatedly been shown, the suggested remedy thoroughly 
fulfills this requirement. 



THE GOLD STANDARD 181 

But the fallacy of the gold standard is of exceedingly 
great interest in illustrating the hold fiction such as this 
can gain on the minds of the greatest authorities, and as 
an example of how such a false promise confuses what is 
really simple and clear. It furnishes an explanation as 
to why our present financial system seems so intricate 
and unintelligible and the depth of the deception is re- 
alized when one sees this fallacy treated as the truth by 
eminent authorities on money and banking. 

An example will bring this point home so clearly that 
an examination of it is highly interesting as well as 
instructive. This is furnished by an address made be- 
fore the Ohio Bankers' Association in 1905, by Leslie M. 
Shaw, Secretary of the Treasury from 1902 to 1907. 

In this address Secretary Shaw is reported to have 
said: 

"The fact, and I think it is a fact, that the United 
States has the best currency in the world does not 
imply that the currency system of the United States 
is perfect, or that it cannot be improved. It is as 
safe as any system in the world because it is estab- 
lished on the only safe basis known to man — the gold 
standard/ 9 

The double standard of gold and silver at the ratio 
of sixteen to one was in force until 1873, when the 
country adopted the gold standard. But panics con- 
tinued to occur every ten years as before, which would 
argue that the gold standard is hardly the great tower 
of strength and safety it is here claimed to be. Mr. 
Shaw continued: 

"The United States dollar is worth not only one 



182 THE STRANGLE HOLD 

hundred cents, but one hundred gold cents. The dol- 
lar is worth 25.8 grains in gold. That measures the 
market value of our dollar. Whatever 25.8 grains of 
gold will buy our dollar will buy, and it is worth 
precisely the same uncoined as coined, for the Govern- 
ment stands ready to coin it free and in unlimited 
quantities." 

All these statements are apparently true, but funda- 
mentally misleading, because a dollar is worth one hun- 
dred cents worth of any commodity and gold is only a 
commodity not one whit different from any other. To 
be sure the price of gold has been fixed by law for 
many generations, which may add to its dignity; but 
during the Food Administration we saw many other com- 
modities, such as wheat, have the same dignity bestowed 
upon them. 

In less than two years after Mr. Shaw made this 
claim of the solidity of our financial system because of 
the gold standard, the country was using clearing house 
certificates under pressure of continued holidays declared 
by the governors of the several states. What difference 
is it whether 25.8 grains of gold is worth a dollar, or a 
bushel of corn is worth a dollar? It is a distinction 
without a difference. 

But Mr. Shaw did not stop here. He went further: 

"Then in addition, every dollar of our currency, 
gold certificates, silver, silver certificates, United 
States notes, Treasury notes, National Bank notes, 
subsidiary silver, nickel, and copper coins, is redeem- 
able in or exchangeable for gold at the will of the 
holder/' 



THE GOLD STANDARD 183 

This statement is true only when the aggregate holders 
of these various other kinds of money do not wish to 
exchange them for gold. It is not true when an occasion 
arises in which they would wish to make the exchange, 
but even if the statement were true Mr. Shaw completely 
ignored bank credit, which constitutes more than 95% 
of our medium of exchange, while everything he men- 
tioned constitutes less than 5%. 
Continuing Mr. Shaw said: 

"This fixes the stability of our currency. Its value 
does not and can not fluctuate." 

If by the use here of the word "currency" the secretary 
intended to confine his statement of gold redemption to 
the "government issued" money alone the statement 
might be true. The government possibly could redeem 
enough "currency" used in this narrow sense to hold it 
at par, but since government issued money, including 
gold, constitutes less than 5% of our MEDIUM OF 
EXCHANGE, the statement, even if true, is to say the 
least entirely misleading. 

Continuing Mr. Shaw then admitted: 

"The system is not perfect, largely because it is 
non-elastic. It fails to respond in volume to the 
changing needs of the seasons and localities. Atten- 
tion has been called to the non-elastic character of 
our currency many times and by many people, but 
that there will be no further currency legislation until 
we shall have experienced a panic occasioned by this 
want of elasticity, I am fully convinced." 
This prophesy that Congress would do nothing to 
improve a very defective financial system, although pub- 



184 THE STRANGLE HOLD 

lie attention had often been called to its defects, proved 
true within two years after it was made, when the panic 
of 1907 caught the country unprepared. In fact, no 
remedial action of importance was taken until six years 
after the panic of 1907, when the Federal Reserve Act 
was evolved. 

As Mr. Shaw also prophetically said: 

"The country does not appreciate the danger, and 

until the danger is fully understood no remedy will 

be applied." 

This still remains true. The danger has never been 
understood, so no remedy could be applied that would 
attack and remove the cause of the trouble. 

Starting out with such assurances of the safety and 
stability of our currency, it seems strange that in the 
midst of so short an address the former Secretary should 
follow immediately with this statement: 

"A glaring defect at a vital point will sometime, 

sooner or later, assert itself. Meantime a remedy 

should be discovered, discussed, and, as far as possible, 

agreed upon, so that it may be promptly applied when 

the people are ready for it." 

Mr. Shaw was not alone in knowing that a glaring 
defect existed. However, he could neither locate nor 
define it. 

In his search for a remedy he discarded "Asset cur- 
rency" as commonly understood, and was correct in so 
doing, because no method had been devised for issuing 
asset currency on a safe basis. Emergency currency in 
the form of clearing house certificates, he condemned in 
the following words: 



THE GOLD STANDARD 185 

"The United States originates more commerce than 
any other country, but our chief commercial city is not 
the world's clearing house. It ought to be, but it is 
not. One reason why it is not is the fact that it has 
sometimes resorted to clearing house certificates, which 
is a plea of guilty to an indictment charging bad 
management locally or bad legislation nationally, and 
the financial world charges both. Clearing house cer- 
tificates must never be authorized by law." 
The suggestion here that with a strong financial sys- 
tem New York would become the world's financial center 
should be noted. 

The remedy suggested by Mr. Shaw was to provide 
an "emergency currency" by permitting the national 
banks to increase their government-bond-secured note 
issue up to fifty per cent over their bond security on 
which excess the bank should pay a tax of five or six 
per cent and the government, in consideration for the 
tax, should guarantee the redemption of the issue. 

His remedy proposed that the printing on the bank 
notes be changed somewhat so that the extra notes could 
be slipped into circulation without attracting attention. 
The last sentence of Mr. Shaw's suggestion should be 
carefully noted. It is a most complete but unconscious 
indictment of our system. His proposed remedy for a 
"vital defect" was as follows: 

"By eliminating the one statement on the present 
bank note, 'This note is secured by bonds of the 
United States/ the additional currency could be made 
identical with that based on Government bonds. The 
Comptroller of the Currency and the bank issuing 



186 THE STRANGLE HOLD 

the currency would alone know of its existence. It 
would not advertise its existence or our extremity." 
We are not criticising Mr. Shaw's remedy, which was 
tried in a little different form by the Emergency Cur- 
rency Act of May 30th, 1908, and which has in a 
changed form been utilized by the Federal Reserve Act. 
But the suggestion that stealth and secrecy are neces- 
sary to the successful operation of a proposed remedy 
for our financial ills completely condemns the system. 
Stealth and secrecy should have no place in a demo- 
cratic government, and a financial system, which because 
of its weakness is compelled to make use of star cham- 
ber methods, is a menace to liberty as well as industry. 
This address of former Secretary Shaw, which starts 
with such a brave defence of the gold standard and the 
stability of a financial system based on it, proves on 
analysis to be a sweeping condemnation of both. Al- 
though using his best endeavor to defend and even 
glorify our financial system, he proves conclusively that 
the gold standard fetish is a lie and that the financial 
system based on it is weak, dangerous and degrading. 
Weak because the silly promise of gold redemption 
makes our currency non-elastic; dangerous because "a 
glaring defect at a vital point" (meaning the gold re- 
demption lie) will some time, sooner or later, assert 
itself, meaning that a panic will ensue when the lie is 
discovered by the people; and degrading because deceit 
must be resorted to to cover up the lie. The suggestion 
that a remedy must be stealthily and secretly applied 
is an unconscious acknowledgment that our whole ex- 
change system is conceived in error. Coming from the 



THE GOLD STANDARD 187 

source it does it proves that the financial world is just 
as much in the dark as the rest of the community re- 
garding the weakness in our financial system. Appar- 
ently our statesmen and financial leaders have never 
seen the real cause of the unfavorable phenomena which 
reveals itself in the form of non-elasticity, money short- 
age, lack of efficiency, industrial turmoil and social 
unrest. 

Here we see a man, holding the most important finan- 
cial position in the United States, addressing financiers, 
the Bankers' Association, starting with a congratulation 
as to the strength of our financial system and ending 
with a suggestion that stealth and cunning are necessary 
to overcome a "vital defect." If this paradox were 
intended, financial humor is certainly subtle. 



CHAPTER XII 
SPECULATION 

Because of the fact that the trade centers in various 
staple commodities — the wheat pit, the cotton market 
and the stock exchange, have been the scene of the 
gain and loss of immense fortunes, most good folk 
have come to consider these places as dens of iniquity 
run by unprincipled crooks. As a matter of fact, 
however, this is not the case, for the trade that goes 
on in these centers has a distinct economic value. Were 
it not for these market centers trade would be much 
more diffiicult, eratic and uncertain. By taking the 
risk of gain or loss off the shoulders of the producers, 
the speculators give a degree of regularity to commerce. 
And the brokers operating in the various markets are 
equal in honesty to any other class of business men. In 
one aspect, indeed, they are even more reliable, since 
they must abide by the rules of the exchange mart in 
which they deal. 

But while the brokers themselves may be honest, there 
is at least one great trade center in which the game is 
not fair, because one set of players has a distinct advan- 
tage over the others. One party controls the wheel of 
fortune, as it were, and consciously or unconsciously, 
regulates it to suit certain interests. 

The trade center referred to is the New York Stock 
Exchange, and the party referred to includes the bank- 

188 



SPECULATION 189 

ing interests. The unfair condition here arises partly 
from the custom of buying stock on margin, as will be 
explained, but its real origin lies in that same defect 
in our financial system that we have come to recognize 
as the fountain head of so many and such great evils 
afflicting our modern industrial community. 

The evil in the stock market is but another bad result 
of the private control of bank credit, by means of which 
the banker, being able to withold loans regardless of 
their merits, is enabled to influence prices and in fact 
regulate the whole current of business. It is cumulative 
evidence that the banker dictates every man's chance 
for financial and industrial success. 

Not all the havoc of the stock market, however, can 
be blamed on the banker. We must remember that he 
is not a free agent for his acts are controlled by the 
reserve requirement. When he gets up against his re- 
serve his credit "freezes" and when quite a number of 
them arrive at the zero point about the same time it 
sends a decided chill down the spine of "Wall Street." 

There is one condition noticeable in the stock ex- 
change, however, which points to an unfair control of 
this game. This condition is the constant fluctuation in 
prices of stocks. 

It is not uncommon to see the price of the stock of 
well established corporations which have been doing a 
steady business for years and paying regular dividends 
fluctuate several dollars within a very short time. The 
price of such stocks may fall violently one day and re- 
cover the next, and a week or a month may show a very 
wide range of prices. 



190 THE STRANGLE HOLD 

It is perfectly clear that such fluctuations cannot 
be due to any change in the real or intrinsic value of the 
stock. Neither the business outlook of the corporation 
nor the state of its prosperity could possibly change 
with such kaleidoscopic rapidity as the prices quoted on 
the exchanges would suggest, so these fluctuations in 
price are not due to the changing value of the stock 
but are due to the change in the money market. 

By intrinsic value is meant the actual or real value of 
the securities, dependent, of course, upon the dividends 
or interest paid on these securities, coupled with the 
safety of the principle invested. The market value is, 
as the name indicates, the price at which the securities 
are bought and sold. 

This market value may, and almost invariably does, 
differ from the intrinsic value, and it may do so to a 
very pronounced degree. The existence of speculation 
in securities arises entirely from this difference between 
intrinsic and market values. 

It is the fluctuation in price that attracts the gambler 
and makes a game of chance of institutions necessary 
in our business and commercial life. 

As has been shown prices fluctuate with the volume 
of the medium of exchange in circulation and with the 
interest or discount rate charged for its use. We have 
seen that these two factors are entirely in the bank- 
ers hands, considering of course his limitations. If we 
can hold these facts in mind, while we examine another 
factor which contributes strongly to making a game of 
chance out of all investment and business, we will see 
just what is at the bottom of price fluctuation and how 



SPECULATION 191 

the stock exchange, cotton exchange and wheat pit are 
turned from legitimate markets into gambling games. 

The other factor above referred to is the trading on 
margin which makes up a considerable proportion of 
the deals on these exchanges. When a margin purchase 
is made the customer does not put up the entire pur- 
chase price of the securities, but only a portion thereof, 
say twenty or thirty per cent. The broker carries the 
balance — virtually loans it to the customer, charging in- 
terest on the amount carried. 

If the stocks dealt in happen to be reliable industrial, 
railroad, or mining stocks, the broker can take the secur- 
ities which he has purchased for his client, to the bank, 
and put them up as collateral for a loan of the differ- 
ence between the margin put up by the customer and 
the price of the stock. The broker borrows this money 
from the bank on call, and lends it to the customer 
on margin. That is, at the expiration of the number of 
days notice agreed upon, the banker can call upon the 
broker to repay the loan. This notice, as agreed upon, 
may be for one, two, three or more days. On the other 
hand, the broker requires the customer to keep his mar- 
gin good. If the price of the stock declines, the cus- 
tomer must put up additional payments to keep the 
same margin or he will be sold out. 

Now here is the way in which the banker secures his 
unfair advantage. Supposing, for instance, the cus- 
tomer buys 1,000 shares of steel at $100 per share and 
puts up a twenty per cent margin, or $20,000. The 
broker may now do either of two things. If he is 
square, he will actually purchase the stock for the cus- 



192 THE STRANGLE HOLD 

tomer. Otherwise he may, as the term is, "bucket the 
order/' that is, he will give the customer a receipt for 
the 1,000 shares, without actually purchasing them; 
he will be taking chances on being able to buy the stock 
later on at a lower price, and pocket the difference; if 
the stock should go up, he would have to lose the dif- 
ference. 

But let us suppose that the broker is honest, and 
actually purchases the stock. Putting up the twenty 
thousand dollars received from the customer, he will 
order the stock to be delivered to the bank: on it, as 
security, he will borrow the balance of eighty thousand 
dollars and pay for the stock. 

Here the broker is in the clear. He runs the game, 
and his profit consists entirely in the percentage which 
he takes as his commission or brokerage, just as does a 
pool seller on a horse race. His profit being certain, 
the price of stocks makes no difference to him so long 
as he conducts a legitimate business. His only interest 
lies in the volume of business on the stock exchange. 

The real game is between the banker, who puts up 
the eighty thousand, and the customer who puts up the 
twenty thousand. The only interest the banker should 
have is to get his money back with interest. But, as is 
most likely, he may be playing the market a little him- 
self ; or perhaps some of his clique desires to obtain a lit- 
tle stock at a cheap price. 

Now suppose the money market tightens up, sup- 
posedly due to any one of a great number of reasons 
assigned by our financial lords, but in reality due to the 
fact that our rulers at the financial center have caused 



SPECULATION 193 

it through cupidity or fear or because the limit of credit 
has been reached. Just a word is sufficient as we have 
seen in the case of automobile credits. 

The banker adds to the money shortage by calling 
in the particular loan of eighty thousand dollars along 
with other loans aggregating several million. 

Neither the broker nor the customer can borrow money 
in a tight money market. Others are in a similar posi- 
tion, and their efforts to borrow lessens the value of the 
security offered, the price of which falls on the ex- 
change. 

As a result, the broker must call on his customer to 
put up more margin. Some are able to do so, but others 
cannot. The broker has to sell the stock to pay the 
bankers loan; the customer is thus squeezed out, and 
the stock, thrown on a declining market, accelerates 
the decline, and results in a call for more margin from 
those still in. 

More customers are frozen out, until finally the price 
reaches bedrock. Now the banker and his friends, the 
big traders, step in, and grab the stock which the cus- 
tomers could not protect by putting up the margins. 
The tight money market and the resulting stock flurry 
are a result, merely, of the fact that the banker had 
stopped his mint: he ceased making loans. Now that 
his clique are in possession of the stocks, he again 
lends money, or in other words, mints bank credit. With 
this, his friends, the inside ring, buy more stock. As a 
result, the prices go up and soon the market is ready 
for another set of customers who come to be divested 
of their money, as sheep to the shearing. 



194 THE STRANGLE HOLD 

The game is well arranged, and certainly more digni- 
fied and orderly than a horse-race, for it runs during 
every business day in the year, and its results are more 
certain than the results of the races. The banker has a 
handle which operates this wheel of fortune, and which 
practically eliminates the factor of chance or uncertainty, 
as far as the insider is concerned. This handle is known 
as "call money." It works like a pump handle. When 
it is pushed down, that is, when call money is cheap, up 
go stocks. When it is pushed up, that is, when the 
banker refuses to make loans, or the discount rate on 
call money is raised, stocks go down. 

Every one knows that the more rapidly you move a 
pump handle up and down the more water you pump 
and it is just as certain that the more rapidly you move 
prices up and down the more gambling you produce. Of 
course, the brokers all know this, and some of the bank- 
ers may, and in order to make the game lively, and in- 
crease their profits, the bankers of New York allow a 
committee of brokers on the stock exchange to fix the 
rate on call money. This committee pumps vigorously 
by varying the rate from five or six to as high as thirty 
per cent. It is fixed every day and all the banks are 
notified of the change. This makes the price of stocks 
fluctuate and gives the insiders a chance to get their 
money down right. 

No doubt there is some reason for changes in the rate 
on call money, but if it were not changed prices would 
not fluctuate so rapidly nor so violently and the gambling 
element in the country would not be attracted. In that 
case the business of these trade marts would be greatly 



SPECULATION 195 

decreased for the business would be confined to legitimate 
trade.* 

As the banker alone controls this handle, he likewise 
operates the wheel of fortune. But as the brokers de- 
pend on the amount of trade or the turn over of the 
exchange and as this volume depends on the gambling 
spirit excited by the fluctuations in prices it is both con- 
venient and effective to have the call money rate fixed 
by the brokers. 

We headed this chapter "Speculation'* but the result 
of operations on the exchange seems to be almost too 
definite to be so designated. This game, if we may still 
consider it a game of chance, has several advantages 
over others we have known. For instance, none of the 
players see each other, and no one is to blame, and so 
no sympathy is wasted on the losers. The broker, the 
only man in sight, has collected two commissions — one 
for buying the stock, the other for selling out the cus- 
tomer. The stock is back to its former price, and the 
only difference is that the customer's money is in the 
pockets of the banker or of his friends, the insiders. 

To point out this aspect of the game to the banker, 
and show him that he had committed a most cowardly 
robbery, would hurt him and surprise him beyond meas- 
ure. We should not blame him, for he is a most re- 
spectable and kindly gentleman, and this aspect has 
never occurred to him. In fact ignorance is the only 
excuse that can be advanced in his favor. He operates 
the pump-handle for the most part unconsciously, so in 



♦See Appendix. 

(Note changes reported by Comptroller) Page 306. 



196 THE STRANGLE HOLD 

the operation of the game the banker is generally inno- 
cent of any evil intent. 

Reserve requirements are for the purpose of perpetu- 
ating the belief that credits are payable in money and 
for the purpose of continuing the gold standard fallacy, 
as has been demonstrated. Both these fictions remain 
from the time when the goldsmith was the banker. The 
whole reserve system was instituted to cover up the gold- 
smith's deception, and is still in force to perpetuate 
the banker' control and furnish him an excuse for re- 
fusing loans. Both the gold standard and the reserve 
system have been stretched to the limit, and are ready 
for the waste-basket. 

But until these fallacies, and the other features of un- 
soundness in our financial system are eliminated, the 
game we have just illustrated, and the evils we have 
shown to follow therefrom, will continue. 

With the proposed remedy, however, the whole aspect 
of affairs would be changed. As we have shown how the 
other evils would disappear, so would this one also van- 
ish. For we have seen that "call money" is the means by 
which this unfair condition is made possible. Under the 
proposed change in our financial system there would be 
no such thing as "call" money. There would be no lack 
of public confidence to guard against, and so the need 
of loaning money on "call" would disappear; the con- 
trolling handle would be removed from the wheel of for- 
tune, and it would run free. 

What little speculation still remained would be a real 
game of chance dependent upon judgment and the 
exigencies of trade and production. 



SPECULATION 197 

A similar improvement would apply to trade in the 
other commercial centers — the wheat pit and the cotton 
exchange. These marts would thrive as centers for in- 
vestment and trade, where people could transact 
legitimate business. The changes in the volume of the 
circulating medium would cease, and with them the re- 
sulting violent fluctuations which invite the gambler and 
enrich the sure-thing speculator. Instead of the present 
artificial fluctuations in price, we would have variations 
in real values only, due to legitimate changes in business 
enterprise. The movement of prices would result from 
differences in business ability, and from the laws of sup- 
ply and demand, but the violent fluctuations arising out 
of the banker's cupidity, fear, lack of enterprise, or 
manipulation of call money, would no longer make of 
business a gambling game. 



CHAPTER XIII 
RURAL CREDITS 

FROM time to time in the history of this country 
political parties have arisen, such as the green- 
back party and later the populist and silver parties, 
which advocated financial reform. The remedies invari- 
ably suggested inflation. 

At one time the continuance of large greenback issues 
was suggested, at another, free coinage, as a means of 
increasing the money supply. Invariably these reforms 
resembled each other, in that they attacked the symptoms 
rather than the cause of the poor financial conditions. 
Owing to the latter fact the remedies proposed would 
not have removed the cause of our financial and indus- 
trial ills. 

But, these political parties, during their time, were 
strongly supported by the farmers. Offhand it might be 
inferred that the financial interests of the farming ele- 
ment are opposed to those of the rest of the community, 
because farmers have always been ready to support par- 
ties proposing financial measures. As a matter of fact, 
however, this conclusion would be far from the truth. 

The real reason for the support given these proposals 
by the farmers is due to the fact that the evils of our 
present financial system fall heaviest upon the agricul- 
tural interests. Those engaged in agricultural pursuits, 
being the more keenly conscious of the ills of the pres- 

198 



RURAL CREDITS 199 

ent system, are the more eager for relief, and so more 
readily responsive to suggested reforms. 

In truth, the interests of the farmers are identical 
with the interests of the rest of the community — except- 
ing those of the parasites who profit by the farmers' 
present ills. 

It is a truism to say that agriculture is the funda- 
mental activity of the world, upon which all industries 
rest. Consequently it follows from this truism that any 
measure which increases the producing power of the 
farmer, is by that very fact a benefit to the community 
us a whole. 

In other words, it is to everybody's interest that the 
farmer should be able to secure the funds necessary to 
carry on his business with an ease equal at least to that 
of any other producer. And yet equal financial facility 
is far from being the condition under our present system. 

The difficulty experienced by the farmer in getting 
adequate credit facility is proverbial. And even under the 
Federal Reserve System no adequate provision was made 
for agricultural interests. This fact was practically ad- 
mitted by the passage of the Farm Loan Act, following 
an ineffectual attempt of the Federal Reserve Board to 
serve the farmers of the country through the national 
banks. 

It may be well to state that the attempt on the part 
of the Federal Reserve Board failed for two reasons. 
The first of these is that the member banks found it dif- 
ficult to serve the interests of the farmer and their own 
interests at the same time. 

The second reason is that private control puts a time 



200 THE STRANGLE HOLD 

lock on the bank's credit which the farmer cannot work. 
The meaning and force of these causes will be explained 
in the following pages. 

But the effect of the failure was the passing by the 
Federal Government of the Farm Loan Act, an act spe- 
cifically intended to deal with the credit requirements 
of agriculture. This act has fallen short of its purpose, 
as will be shown presently, but irrespective of its suc- 
cess or failure, we may inquire as to the implication of 
this special act. 

Is it not an acknowledgment that agriculture, upon 
which all other commercial activities depend, is prac- 
tically outlawed under the present financial system ? And 
does it not seem to imply that the farmer, like the 
Indian, is a ward of the government? 

Singling the farmer out from the rest of the busi- 
ness world as this rural credit legislation does, it sug- 
gests that he is a kind of financial weakling, unable to 
take care of himself, and, therefore, a fit subject for 
special governmental care. 

Let us see whether such an impression is in any way 
justified. Let us compare the manner in which the 
farmer has run his business — that of providing food, or 
taking care of the food requirements of the country — 
with the way the banker has run his business, the busi- 
ness of taking care of the credit requirements of the 
country. 

From 1837 to 1907, as we learned, a disastrous finan- 
cial panic occurred on an average of once every ten 
years, with several money stringencies in between the 
times of panic. 



RURAL CREDITS 201 

Since the banks have displaced government money by 
bank credit it is the banker's business to supply the 
nation's commerce and industry with an adequate amount 
of the medium of exchange, and the bankers are plainly 
at fault when this medium is not adequately supplied. 

Consequently, this decennial breakdown of the finan- 
cial system suggests a considerable degree of inefficiency 
on the part of those who have assumed the responsibil- 
ity of supplying the medium of exchange. 

A breakdown of the agricultural system in any way 
comparable with the oft-repeated collapse of the finan- 
cial system would have meant dire famine throughout 
the land. Such a famine has not once occurred. 

While the banker has repeatedly failed to supply us 
with a medium of exchange adequate to the needs of the 
business of the country, thereby bringing loss and mis- 
ery, not only upon himself, but upon the entire nation, 
the farmer has meanwhile gone steadily on, supplying 
to the country, year after year, its requisite food supply. 

Considering achievement, therefore, there is no jus- 
tification for the assumption that the farmer is less 
capable financially than other producers. The fact that 
the government is obliged to establish a special institu- 
tion to take care of his financial necessities is clearly not 
due to any fault of his. 

After a consideration of the foregoing, are we not jus- 
tified in placing a charge of inefficiency against the 
banker, rather than against the farmer, for the failure 
of the present financial system to supply proper credit 
facilities for agricultural enterprises ? As we shall show, 
this assumption is entirely correct. 



202 THE STRANGLE HOLD 

But for the present let us note how, through our gov- 
ernment, we have treated these two different groups, 
the farmers and the bankers. Let us make a comparison 
of the help given by the nation to the banker with that 
given to the farmer. 

After the bankers had made experiments at the na- 
tion's expense, going even to the extent of issuing 
clearing house certificates in open defiance of the laws 
of the land, the country came to their rescue and placed 
the credit of the United States back of their credit 
through the Federal Reserve System. If the bank now 
trades a little too much on its credit and finds that cur- 
rent funds are needed to conduct business safely and 
profitably, there is at hand an institution, supplied with 
practically an unlimited amount of government money 
which it will exchange, dollar for dollar, for the notes 
and drafts and other commercial paper that the banker 
has purchased. 

But, although the Federal Reserve System furnished 
the banker with ideal facilities, the law did not require 
him to use any of his own time or to assume any respon- 
sibility in its establishment or operation. The only re- 
quirement was that he make an investment of six per 
cent of his capital and surplus, on which he was assured 
a six per cent cumulative dividend. 

But note the difference in the case of the farmer. In 
order that he may take advantage of the Farm Loan Act, 
the farmer must get nine other farmers in the neighbor- 
hood to join with him, all of whom measure up to cer- 
tain definite qualifications. These ten must then incor- 
porate a "National Farm Loan Association," a banking 



RURAL CREDITS 203 

institution which they must officer and manage, although 
banking is entirely foreign to their business experience. 
They are then required to subscribe to the stock of this 
association five per cent of the aggregate sum the asso- 
ciation wishes to borrow. 

This subscription carries with it a stockholder's liabil- 
ity which cannot be evaded, as the holders are not per- 
mitted to sell their stock. When all this complicated 
business is done, the farmer may borrow from one hun- 
dred to ten thousand dollars on a mortgage payable in a 
definitely prescribed way in not less than ^ve nor more 
than forty years, and the money borrowed may be used 
for only a few specified purposes and for none other. 

These provisions are such that the farmer who needs 
money, unless to clear an existing mortgage, probably 
would have to go outside to borrow funds for the re- 
quired subscription to the Farm Loan Association stock. 
If the farmer's condition and needs meet the rigid re- 
strictions of the loan, he may borrow to pay for land, 
buildings and implements which constitute his plant; but 
no provision is made for working capital. 

Now farming requires financing on terms similar to 
other manufacturing industries. Two prime factors en- 
ter into the building and operating of any manufacturing 
enterprise. First, there must be capital to pay for the 
site, construct the buildings, and supply the machinery 
of the plant. Secondly, there must be funds for opera- 
tion. The second requirement is fully as important as 
the first, for many well-planned and completely equipped 
manufacturing enterprises have failed for the lack of 
adequate working capital. 



204 THE STRANGLE HOLD 

Now the Farm Loan Act was doubtless an attempt to 
meet the farmer's financial necessities. Its principal ob- 
ject, however, as stated in the title of the act, seems to 
be — "to create standard forms of investment based on 
farm mortgages," giving only a minor place to the 
ostensible object, "to provide capital for agricultural de- 
velopment." In this way the interests of the farmer are 
made incidental only to those of the investor. 

Therefore, as a remedy for the extremely unsatis- 
factory financial condition of the farmer, the Farm Loan 
Act is far from being successful. For while it attempts 
in a fashion to supply capital for the farm plant and 
equipment, it not only fails to supply working capital, 
but makes it increasingly difficult to obtain the necessary 
current credit after supplying funds for the plant and 
accessories. 

At a signal of distress, the country came to the rescue 
of the banker with the Federal Reserve System, which 
supplied him with a completely equipped institution 
backed by the credit of the nation and ready to serve, 
him without cost of time, money or responsibility. 

But the plea of the farmer was answered by throw- 
ing him a bunch of red tape and a few dollars out of 
which he was supposed to fashion an institution which 
would supply his special needs. So many conditions were 
attached to the money, finally supplied, that few farmers 
could take advantage of the opportunity to secure it. 
Those who, after much labor, erected such an institution, 
found that it met but half their needs at best, and this 
need was not the portion of greater necessity to the ma- 
jority of farmers, which was for working capital. 



RURAL CREDITS 205 

Suppose a limb of the human body suffered because an 
arterial stricture shut off its required supply of the life- 
giving fluid. Would surgeons attempt to cure the af- 
fected limb by amputating it and expecting it to live and 
prosper by setting up its own circulatory system? Yet 
this is in reality what the Farm Loan Act does, for 
our medium of exchange, whether it be gold, govern- 
ment paper, or bank credit, is the life-blood of the 
nation. Because of a stricture in the circulation of our 
medium of exchange, the Farm Loan Act severs the 
agricultural limb from the national body, and expects it 
to lead a separate existence. 

And what is still worse, this Farm Loan Act does not 
even do what it sets out to do. In farming, as in every 
other industry, two financial elements are required for 
success. The Farm Loan Act attempts to provide for 
only one, and makes the securing of the other more 
difficult. 

It requires the farmer to organize and operate Farm 
Loan Associations that he may secure a part of the first 
element of success — a plant — and this very act hinders 
him in securing the second element, working capital. 

Our farmers have conquered the wilderness and have 
carried the light of civilization and the little red school 
house across a vast continent ; they have fought and won 
battles for freedom in the past and have proved a great 
factor in the world struggle just ended. Therefore, to 
single them out of the community, as the Farm Loan Act 
does, and expect them to set up and put into successful 
operation a banking institution which creates a separate 
financial world, wherein they must live and prosper, is 



206 THE STRANGLE HOLD 

adding insult to injury^ and imposes on them an un- 
warranted task. 

From the time the farmer puts the plow into the 
ground^ to the time his crop reaches the market, he is 
beset by insect and animal pests and by weather con- 
ditions, labor, and transportation difficulties. 

When his product finally does arrive at the market, he 
is met by the speculator. This Ishmaelite, aided and 
abetted by our financial system, takes a liberal and easy 
toll from what has been produced by hard physical toil 
and unremitting care. 

The farmer who survives these natural and financial 
enemies must be a hardy individual, justly entitled to 
be considered the bone and sinew of the nation. 

But, as if this were not enough, the Farm Loan Act, 
as we have seen, requires the farmer to provide his own 
credits. Supplying credit is clearly the banker's busi- 
ness; and, as if he had not enough burdens already, the 
farmer is required to take over the banker's work also. 

The farmer should not be compelled to provide his 
own system of financing any more than the banker 
should be compelled to grow his own food. 

Division of labor is requisite to civilization, and it is 
the farmer's function to supply food and raw material. 
The banker, in common with all other members of society, 
is dependent upon the farmer for food and clothing, just 
as all other elements of society are dependent upon the 
banker for the medium used in exchanging goods and 
services. 

The banker's dependence upon the farmer is not so 
direct, and is, therefore, not so easily controlled, nor so 



RURAL CREDITS 207 

keenly felt, but it can be clearly seen, however, if one 
pictures a situation wherein the banker would be forced 
to produce that which the farmer might choose to refuse 
him. 

Now then it is certain that just as it is the farmer's 
function to provide us with food and raw materials, so 
it is the banker's function to provide all with the medium 
of exchange. The failure of the banker to supply the 
farmer with proper credit facility on terms similar to 
those extended to the other producers, is due to inef- 
ficiency on the part of the banker and is no fault of 
the farmer. Yet the result of the flaw in our system 
has been to make the farmer a financial nuisance to the 
banker, and a subject for governmental care. 

But in this phase of the general situation, as in all 
those we have already dealt with, the real cause of the 
trouble is neither with the banker nor the farmer. 

It is in the fundamental fault of the system. It arises 
out of that defect in our present financial arrangement 
that is responsible for all other evils — the defect of pri- 
vate control, and its inability to endow bank credit with 
a full measure of public confidence. 

To prove our case, let us compare the situation of a 
farmer with that of a manufacturer. 

A shoe manufacturer, for instance, having the tech- 
nical kn6wledge, the machinery and tools necessary and 
enough money to pay a month's rent in advance, can 
start a factory with assurance of success, because he is 
able to use the present financial system. In addition to 
his plant he needs leather and labor. To secure the 
leather, the manufacturer simply orders it and when it 



208 THE STRANGLE HOLD 

arrives he "accepts" a draft for the price payable to the 
vendor within thirty to ninety days. This draft is called 
an * 'acceptance/' which the leather dealer may discount 
at his bank for cash. 

Our shoemaker next employs labor and begins to turn 
out shoes. If he has a reputation as a successful shoe 
manufacturer almost any commercial bank will provide 
the money (or most of it) to carry his payroll — for 
thirty days or more. During this period he gets goods 
ready for the market. Then he sells the shoes at a price 
that covers the cost of leather, labor, rent and profit and 
draws a draft on the purchaser, who writes "accepted" 
across the face of it and signs his name. This paper, the 
manufacturer turns into his bank, where it is discounted 
for cash. Out of the proceeds of this draft, the manu- 
facturer pays the bank the money advanced for the pay- 
roll and the acceptance for the leather, besides taking 
care of the coming month's rent. Furthermore, he still 
retains a profit that he is not compelled to turn over to 
a speculator. 

To start this manufacturing business, we grant that 
the shoemaker had a technical knowledge of shoe mak- 
ing, some equipment, enough money to pay a month's 
rent and the incidentals for sixty days. The bank, how- 
ever, did the rest, and was glad to get the business. 

Now the farmer is a manufacturer, just as surely as 
the shoemaker. He takes the raw material in the form 
of seeds and live stock, and through labor applied to 
the soil and the care of animals, he produces goods for 
the market. Provided he is equally capable in his line, 
and enjoys an equal reputation for success and honesty, 



RURAL CREDITS 209 

is it not clear that he should have the privilege of doing 
business in the same manner as the shoemaker? And in 
fact, his property, business stability, efficiency, and his 
record for meeting his obligations, are such as justly to 
entitle him to ask credit from the banker on the same 
terms as those upon which other lines of endeavor are 
financed. 

At present, this privilege is denied him. As we now 
see, it is by no means his fault. Nor is it the fault 
of the banker. It is the fault of the banking system, 
which, owing to a lack of public confidence due to pri- 
vate control, is forced to set a time limit of thirty, sixty 
and ninety days for commercial credits. 

Unlike other producers, the farmer is dependent upon 
nature, and cannot produce his goods within ninety days. 

If the banker could put one hundred per cent con- 
fidence into his credit, and keep it there, no time limit 
for credit would be necessary nor would reserve require- 
ments, which limit the amount of bank credit, then be 
necessary. 

If after securing public confidence the banker were 
required to treat all applicants for loans alike, there 
would be no necessity for rural credit institutions, nor 
for a government financing corporation such as we had 
during the war and which has been reinstated recently. 
In that case everyone, farmers included, would be en- 
abled to make such use of the medium of exchange as 
their business justified. 

But until the people know that every dollar of credit 
issued by the bank is based on safe and ample security, 
they will not have complete confidence in bank credit. 



210 THE STRANGLE HOLD 

And until this one hundred per cent confidence is at- 
tained, commercial banks will have to base their loans 
on "liquid" assets and will have to continue to limit 
their loans to thirty, sixty and ninety days. This limit 
of time will continue to make commercial banks useless, 
or almost so, to the farmer, the exporter, and to nearly 
all other business interests requiring a longer use of 
credit. 

Securities now may be perfectly good, and yet may 
not be liquid. Of these the banker will say: "It is a 
good, but not a bankable, security." 

Statistics show that the farmer's security is good. It 
is not bankable, however, because he must have money 
for longer than ninety days. 

The banker, not being able to command sufficient pub- 
lic confidence, cannot safely issue his credit for a longer 
period. 

Since the banker "issues" practically all of our me- 
dium of exchange, the farmer is through this defect, and 
through no fault of his own, outlawed by our present 
financial system. 

As the farmer is an important member of society, and 
since the banker had to eliminate him to insure his own 
safety, Congress created a special institution supposedly 
for his benefit. 

While, therefore, the Farm Loan Act would seem to 
be for the farmer's benefit and implies inefficiency on his 
part, in reality its purpose is to relieve the banker of a 
duty that is plainly his. It is in truth a relief meas- 
ure for the banking interests and a token of the banker's 
inability, and not one to relieve the farmer nor is it due 



RURAL CREDITS 211 

to any inefficiency on his part. Let us see what the 
present situation leads to. 

Thirty, sixty and ninety day money will not raise and 
harvest a crop or carry live stock during its period of 
growth. But it will enable a middle man to market 
harvested crops and matured stock. 

So here we see our present system opposing fhe best 
interests of the community and the banker unconsciously 
standing in league with the despoiler. 

The middle man knows how to use short time money 
and how to get it from the commercial banks, so he takes 
a slice from the profit which rightfully belongs to the 
farmer, and extracts additional tribute from the con- 
sumer, without contributing one fraction of a mill to the 
value of the product. 

Our whole financial system is framed for the benefit 
of this go-between, while the farmer, upon whom the 
community depends, remains an economic outcast be- 
cause of his inability to get inside the banker's time 
limit. 

And there is yet a further effect of this stt of circum- 
stances, in that a second reason is furnished which will 
cause present conditions to continue to prevail under the 
existing financial system. 

In the first place, the bank must maintain a bulkhead 
of liquid assets against a possible decrease in public con- 
fidence; and a twelve, eighteen, or twenty- four months' 
note signed by a farmer, who is unknown to the commu- 
nity, is not a liquid asset. 

The second reason is that the banker makes a greater 
profit by dealing with the speculator than with the 



212 THE STRANGLE HOLD 

farmer; and, since a bank is a private institution, so 
long as it is permitted to serve private interests without 
regard to public welfare, it will naturally seek the source 
of larger profits. 

With regard to this, it is true, and happily so, that 
individual bankers are not now so generally seeking "ex- 
tra profits" as in times past. Nevertheless, those who so 
desire can still align themselves with speculators in a 
combination which stands both farmer and consumer on 
their heads and shakes the money out of their pockets. 

Now the only difference between the bank credit re- 
quired by the farmer and that supplied to the merchant 
and speculator lies in the length of time for which it 
must run. The farmer requires longer credit than the 
banker is able to give him, under existing conditions. 
As we have seen, the proposed remedy, when in effect, 
will place a full hundred per cent of public confidence 
behind bank credit, and thereby remove all necessity for 
a time-limitation. In that case also the amount a bank 
could lend would be limited only by the amount of good 
security offered and not by a silly reserve requirement 
as at present. Farmers would then be on the same 
financial footing as merchants, and farm loan acts and 
the like could be consigned to the scrap pile. 

As may well be imagined, the effects of such a change 
upon the welfare of the nation would be tremendous, so 
great, indeed, as to baffle our powers of description. 

Suffice it, then, to point out one phase of the benefit 
to be gained, letting each individual see for himself 
what the total benefit would be. 

As we have seen, owing to the present limitations on 



RURAL CREDITS 213 

bank credit, the farmer has become a financial nuisance 
to the banker, and a fit subject for governmental eare. 
This condition is a detriment to agriculture. It has 
naturally caused people to depreciate the farming busi- 
ness. If, however, the agricultural interests enjoyed 
the same financial facilities as the manufacturer and 
speculator — that is, if a farmer could sign a note at five 
or six per cent per annum for a large share of what 
it cost him to plant and harvest his crop, or rear his 
stock, to be paid only when the goods produced are sent 
to market, then he would become a much more contented 
and respected citizen. This would be the cure for "ur- 
banitis." A "back to the soil" movement would arise of 
itself, and the problem of congested centers of popula- 
tion would be solved. 



CHAPTER XIV 
THE FEDERAL RESERVE 

THE creation of the Federal Reserve System marked 
a very great improvement in our financial and bank- 
ing situation. 

The fact is before it was instituted it could scarcely 
be said that we had a financial system. To be sure, we 
had banks the same as we have now, but we had no sys- 
tem, for each bank stood alone except in so far as banks 
co-operated by agreement among themselves or through 
the clearing house. 

The effect of such a condition is best described by 
pointing to the fact that the country had a disastrous 
financial panic every ten years for the eighty years pre- 
ceding 1907 with severe money stringencies in between 
the panics. Besides the panics and semi-panics money 
was always so tight every harvest time that the country 
heaved a great sigh of relief when the harvest was over. 
Any important event such as an election or a large busi- 
ness failure was liable to upset the whole credit structure 
and cause a panic. 

The Federal Reserve Act has proved a great relief 
and it was slipped into Uncle Sam's Christmas stock- 
ing not a day too soon. It was approved on the 
twenty-third day of December, 1913, and turned out to 
be a valuable Christmas present. Subsequent events 
suggest that the motto on our coin, "In God we trust," 

214 



THE FEDERAL RESERVE 215 

was chosen advisedly, for an all- wise Providence must 
have directed the adoption of this act at this particular 
time. 

Not long after its adoption came the shock of war, 
which would have thrown our shaky financial system to 
the ground, like a house of cards, had it not been for 
the support given it by the new law. That this support 
was provided just in time to avert a great calamity proves 
that our faith in Providence has not been misplaced. 

Roughly stated, the main feature of this act is that it 
created a central bank of issue similar to that which 
most European countries have had for many years. That 
is it created a bank for the bankers, where banks be- 
longing to the Federal jReserve System keep their 
reserves and where they may discount or sell the notes, 
etc., they take for loans. In exchange for such paper as 
the Federal Reserve will discount, it pays federal reserve 
notes or federal reserve bank notes. 

The law provides for a 40% gold reserve behind fed- 
eral reserve notes, but the federal reserve bank notes are 
issued against government obligations in about the same 
way national bank notes are issued. In brief, these are 
the features of the system. 

The value of the act was felt by the Comptroller of 
the Currency, who expresses what is owed to the Federal 
Reserve System in his report for 1916. After speaking 
of the unprecedented commercial activities of the pre- 
ceding twelve months, he goes on to say — 

"In past years, under inadequate and unscientific 
banking and currency methods and systems, a great in- 
crease in business activity has almost invariably pro- 



216 THE STRANGLE HOLD 

duced a money scarcity, has occasioned high interest 
rates, and sometimes has precipitated panics: but dur- 
ing the last eighteen months of unexampled prosperity 
we have enjoyed, throughout the length and breadth 
of the land, the lowest money rates the country has 
ever seen." 

"No fair-minded man who has studied financial and 
business conditions for the past two or three years 
can fail to see how large a measure of these deeply 
gratifying results are to be credited to the operation 
of our Federal Reserve System." 

This statement is a great tribute to the new system, 
but on closer inspection the words may also be seen 
to imply something else, something that we have been 
steadily maintaining all along. 

To speak plainly, the Comptroller's words mean: first, 
that our privately administered financial system had 
always been an automatic brake on progress and pros- 
perity; second, that the Federal Reserve System gave 
the private interests a certain amount of control, so that 
today a period of progress and prosperity is not nec- 
essarily followed by a financial panic. 

Even private control is better than no control and, 
therefore, in so far as the Federal Reserve System has 
given the bankers a certain degree of control it has 
proved itself to be a benefit. 

With its assistance, the crucial panic period of 1917 
was weathered without a break-down in our financial 
system, such as had been a decennial occurrence since 
1837. For this relief from panic we must thank the new 
system but our present state of business collapse indi- 



THE FEDERAL RESERVE 217 

cates that the sore spot has not yet been reached. The 
improvement made lies in the fact that our financiers have 
learned a lesson in the expensive school of experience in 
which they have been blindly working for so long. The 
lesson learned is the main principle that has been advo- 
cated by the writer, namely, that the only way of fixing 
the volume of the medium of exchange at the proper 
amount is to let the demands of business fix it; or in 
other words, by letting the productive activity of the 
community determine the amount of the medium of ex- 
change in circulation. Let business control the medium 
by which it is carried on instead of having the medium 
control business. 

The system attempts to achieve this object through 
the federal reserve notes, which are issued against 
commercial paper — that is, notes arising out of business 
transactions. As stated in the title of the act the object 
is to furnish an "elastic currency." 

While the object sought was elasticity the act restricts 
the expansibility or elasticity of the currency by limiting 
the discount privilege to certain paper — "self -liquidat- 
ing" securities — and also by the requirement of a 40% 
gold reserve against the federal reserve notes. 

This latter restriction clearly demonstrates the 
tenacious hold which the fallacious gold standard pos- 
sesses over the human mind. Even in a measure designed 
to alleviate the evils that follow from it, it cannot be 
shaken off. 

However, this restriction is greatly modified by Sec- 
tion 11-C of the Federal Reserve Act, which gives the 
Federal Reserve Board power to suspend ALL RE- 



218 THE STRANGLE HOLD 

SERVE REQUIREMENTS for thirty days and renew 

such suspension for fifteen-day periods without limit. 

This provision which follows permits an unlimited issue 

of federal reserve notes, "provided that it (the Board) 

shall establish a graduated tax upon the amounts by 

which the reserve requirements of this Act may be 

permitted to fall below the level hereinafter specified/' 

and "provided further, that when the gold reserve held 

against federal reserve notes falls below 40 per 

centum, the Federal Reserve Board shall establish a 

graduated tax of not more than one per centum per 

annum upon such deficiency until the reserve fall to 

S2 l / 2 per centum, and when said reserve falls below 

32*4 P er centum, a tax at the rate increasingly of 

not less than 1% per centum per annum upon each 

&/% per centum or fraction thereof that such reserve 

falls below S2y 2 per centum. The tax shall be paid 

by the reserve bank, but the reserve bank shall add 

an amount equal to said tax to the rates of interest and 

discount fixed by the Federal Reserve Board." 

The effect of this section is to make possible the 

issuing of federal reserve notes to an amount limited 

only by the demands of business or the action of the 

Federal Reserve Board. 

The object of the provision is to do away with the 
limit fixed by gold on the elasticity of our medium of 
exchange — to unfetter it, so its volume may expand to 
meet the demands of growing and progressive industry. 
This section, coupled with our present business con- 
dition, confirms all that we have been contending for, so 
let us examine it carefully. 



THE FEDERAL RESERVE 219 

The first point to note is that it gives the Federal 
Reserve Board the power to suspend ALL RESERVE 
REQUIREMENTS and such suspension may be con- 
tinued indefinitely. 

"Necessity is the Mother of Invention/' and every 
one who has followed these pages must see clearly what 
was the necessity that caused this provision to be in- 
serted in this law. 

The provision so completely bears out our whole con- 
tention and the present unsatisfactory business condi- 
tions make it so clear that the object of the provision 
cannot be gained until the reform suggested herein is 
carried out that a few points must be reviewed. 

Every expansion of business calls for a corresponding 
expansion in the medium of exchange. If for any reason 
the medium cannot or does not expand business hesitates 
and shakes confidence; then a slump follows. From the 
beginning of the commercial era the experience of trade 
the world over has been the same — slump has always 
followed prosperity — hard times have followed good. 
Every financial reform has sought to overcome this oft 
repeated phenomena but it continues to the present 
moment, as we are only too well aware. Two years ago 
industry was brisk, labor was active, business was good 
and times were prosperous; about a year ago credit was 
shut off or "froze up," business wavered for a few 
months, and then the slump started. 

Some maintained it was due to "liquidation/' others 
said it was a "buyers' strike," while everybody laid it to 
the "H. C. L." and now we are promised good times as 
soon as we return to "normalcy." But the trouble with 



220 THE STRANGLE HOLD 

"normalcy" is that a condition of slump or hard times 
is just as much or a little more our normal condition 
than prosperity and good times. 

It has been fully explained how this condition is 
brought about because credit is limited to a promise to 
pay a certain commodity, gold, which makes a reserve 
limit necessary. This folly and deception is exposed in 
the following chapter although it is fully explained in 
Chapter V and the method by which it may be overcome 
is given in Chapters VII and VIII. 

The present slump makes it most certain that this pro- 
vision in the Federal Reserve Act which was intended to 
overcome the phenomena of slump following prosperity 
has not accomplished its object. 

A little reflection will show the reasons. We still have 
the false promise of gold redemption as a basis for credit 
and its use is privately controlled. Until these defects 
are removed the phenomena will continue. 

This provision is a wise one and aimed in the right 
direction, for it is an attempt to overcome the limit fixed 
by the gold standard. It shows that part of the lesson 
has been learned. But while aimed in the right direc- 
tion, it is not aimed at the real cause of the trouble 
— private control. However, it shows clearly that finan- 
cial reform is tending in the direction we wish it to go 
and the suggestion in Chapter VIII, of thirty words to 
be inserted in the Federal Reserve Act, which will over- 
come all the trouble, is but one short step in advance. 

This provision in the act had to fight against a strong 
national prejudice which had been handed down from the 
beginning of our government. The provision, in permit- 



THE FEDERAL RESERVE 221 

ting an unlimited paper currency, as it does, had to en- 
counter a long-continued and deep-seated enmity against 
precisely this one thing — an unlimited paper currency. 

We should also note that the Federal Reserve Act 
overcame another national prejudice, as deep-seated and 
as long-continued as that against an unlimited paper cur- 
rency. That was the prejudice against a central bank 
exercising some measure of uniform control over its 
many, diverse and scattered branch banks — a prejudice 
which has existed ever since the downfall of the Second 
United States Bank. 

This prejudice may not be overcome but it has been 
sidetracked by the Federal Reserve System. This was 
accomplished by side-stepping and the juggling of terms 
in this way. Since the country was opposed to a central 
bank, twelve regional districts, with a Federal Reserve 
Bank and a board of directors in each district, were cre- 
ated. Then all were put under the control of the Federal 
Reserve Board in Washington. In this way a uniform 
control is exercised over the different banks just as if 
they were branches of one central bank. 

In effect, then, and in order to circumvent a popular 
prejudice, the act did not establish a central bank with 
a branch in each district, as in Europe, but instead es- 
tablished the branch banks, and then consolidated them 
under one supreme management. Except for this distinc- 
tion, which is really no difference, the Federal Reserve 
System is a reproduction of the European central bank 
idea. It very closely approaches the German Reichsbank 
in structure, method of management, and operation. 

To the Federal Reserve System, then, we owe the fact 



222 THE STRANGLE HOLD 

that our country has been able to pass through a period 
of great stress without recurrence of the formerly in- 
evitable phenomena of bank runs and financial panic. 
These evils the Federal Reserve System has, at least so 
far, checked, and to this extent it has been a benefit. 

Tight money and panics, however, are only the symp- 
toms of a deep-seated trouble, and the system cannot be 
rectified until the underlying flaw has been removed. This 
flaw has not been removed, for the Federal Reserve Sys- 
tem has not broken the strangle-hold of our bankers 
upon the prosperity and business life of the communit} 7 '. 
So far from removing the private control of our bank- 
ers over our medium of exchange, the Federal Reserve 
System tends rather to strengthen it. This private con- 
trol, the real trouble maker, like the mosquito which car- 
ries the yellow fever germ, is relatively insignificant in 
comparison with its bad effects, which no doubt ex- 
plains why it has evaded detection so long and why it 
was left untouched by the Federal Reserve Act. 

Instead of securing 100% confidence by public con- 
trol of bank credit, the Federal Reserve System seeks 
to gain confidence for our medium of exchange by put- 
ting the nation's credit at the disposal of the banks. 
This arrangement has to a degree allayed the bad symp- 
toms of bank-runs and panics. 

The nation's credit is loaned to the bankers by pro- 
viding a discount market for the paper the banker buys 
with his credit. That is, it established "shops" (the 
regional bank) where banks belonging to the system may 
exchange the notes they have taken from their custom- 
ers for federal reserve notes, which are guaranteed by 



THE FEDERAL RESERVE 223 

the government. This arrangement has greatly strength- 
ened the position of the banker and reduced the hazard 
of loss of public confidence. Through the regional banks 
all the discountable paper in a member bank's possession 
can be turned into government paper any time its depos- 
itors want money. Assuredly such an arrangement 
strengthens public confidence in the banks, for it prac- 
tically gives to each member bank a master key to the 
national treasury. ' 

Putting the nation's credit at the disposal of the bank- 
ers has, of course, increased their lending power and to 
that extent the system has improved the elasticity of our 
exchange medium. 

That we have improved our financial system by estab- 
lishing the Federal Reserve Bank cannot be denied for 
we have increased the two elements, safety and elasticity 
and on them depends the efficiency of any medium of 
exchange. But, would not these two vital elements, 
safety and elasticity, be enhanced still further by public 
control of bank credit? 

If the people knew that every loan every bank made 
was based on security approved by themselves they would 
have one hundred percent confidence in bank credit. In 
that case all bank credit would be perfectly safe and 
any or all of it could be exchanged for federal reserve 
notes whenever desired. 

Under public control the amount of bank credit would 
be limited only by the amount of good security offered 
and as equal facility would be en j oyed by all, our medium 
of exchange would then be one hundred percent elastic. 

So public control, by giving perfect safety and per- 



224 THE STRANGLE HOLD 

feet elasticity, would accomplish what the Federal Re- 
serve Act tries to accomplish. 

As long as bank loans are left to the unrestricted will 
of the bankers the little gain in safety and elasticity 
secured by means of the Federal Reserve Act are at alto- 
gether too great a cost in personal liberty and national 
efficiency. 

To give up our American principles of liberty and 
equality for any degree of financial stability is too much 
like asking the wolf to accept the house dog's collar in 
order that he may be well fed. 

A remedy that aims to improve our financial system at 
the cost of our principles may be suffered as a pallia- 
tive, but only pending the operation necessary for a 
cure. 

While admitting that it has greatly improved our 
financial system, the Federal Reserve Act does not reach 
the fundamental evil. On the contrary, it only tends to 
cover up the flaw, private control, by giving it the ap- 
pearance of public control. The impression of public 
control is created through the federal reserve notes 
being printed by the government but they are issued only 
when and as called for by the banker. 

Instead of breaking the hold of private interests on 
the commercial life of the nation we see that the amount 
of federal reserve notes in circulation depends entirely 
upon the amount of paper the private banks choose to 
discount. To insure justice and an equal opportunity 
for all and to promote efficiency and prosperity the cir- 
culating medium should be regulated entirely by the 
business activity of the whole community. 



THE FEDERAL RESERVE 225 

To the extent that the Federal Reserve supplies an 
elastic currency through privately owned and controlled 
banks it is good, but it serves only those interests which 
have access to these private banks. It does not, in its 
present form, nationalize our medium of exchange as it 
should and could be made to do, nor does it remove the 
stranglehold of private interests from the throat of in- 
dustry. 

The title of the Federal Reserve Act recites that the 
primary purpose of the act is "to furnish an elastic cur- 
rency, to afford means of rediscounting commercial 
paper," etc. The only means by which the act furnishes 
an elastic currency are: First, by reducing the legal 
reserves required to be held by member banks, thus 
allowing them to issue a larger amount of bank credit on 
the reserve; and, second, by allowing the member banks 
to take private obligations (acceptances and commercial 
paper) purchased with their credit to the Federal Re- 
serve Bank and exchange this private paper for govern- 
ment obligations in the form of federal reserve notes. 

This crystallization of bank credit into government 
money adds greatly to the stability and value of bank 
credit and dignifies it by the name of currency. The 
added amount of bank credit put into circulation by the 
reduction of legal reserve requirements and the increased 
credit that banks are encouraged to issue through dis- 
counting private paper for federal reserve notes, con- 
stitutes the "elastic currency" furnished under the Act. 

The accepted meaning of the term "currency" is gov- 
ernment-issued paper money, and in this sense the fed- 
eral reserve notes are "currency," since they are issued 



226 THE STRANGLE HOLD 

by a Federal institution (the Federal Reserve Board) 
and they are obligations of the government. Yet the 
word "currency" is essentially misleading when applied 
to these notes. A careful examination of the modus 
operandi of their issuance shows that they are put into 
circulation only on the action of the banker and not at 
the will of the government. The government institution 
which issues them operates only when the banker turns 
the crank because they are issued only in exchange for 
paper which the banker has taken by making a loan of 
his credit. 

The point is this, and it should be perfectly under- 
stood: federal reserve notes are called forth only in 
exchange for commercial paper purchased by the banker 
with bank credit. It is done in this way: Jones wants 
to borrow money. He goes to the bank where he is known 
and applies for a loan. If the bank's finance committee 
(our "money trust") passes the loan Jones puts up his 
note and securities and receives credit (bank credit) on 
his pass book for the amount borrowed. Now let us sup- 
pose Jones and others draw on the bank to the extent 
that the banker needs money. In that case the banker 
simply takes Jones' note to a Federal Reserve regional 
bank and exchanges it for its discount value in federal 
reserve notes. This privilege of trading private paper 
for government money is extended only to "member 
banks." Since this currency is issued only in exchange 
for paper presented by these banks, we have in effect 
turned the United States mint over to the bankers. 

How completely the mint has been turned over to the 
banking interests may be judged by the percentage which 



THE FEDERAL RESERVE 227 

these notes and national bank notes bear to all the cur- 
rency in circulation. 

Before the days of the Federal Reserve we had in 
circulation, besides the national bank notes, greenbacks 
and gold and silver certificates. The bank notes, as their 
name implies, were and are "bank money" issued by the 
national banks and we have seen that the federal re- 
serve notes are also bank money, but the others were 
and occasionally are now issued by the government and 
may be referred to as the "people's money." 

Now in order to ascertain to what extent the banks 
have encroached on this most important function of 
issuing money, that is, to what extent the bankers have 
taken charge of our mint — just take note of the money 
that comes into your possession and see what per- 
centage of the whole is made up of gold coin, gold and 
silver certificates or greenbacks of large denomination 
and what percentage consists of national bank notes, 
federal reserve notes or federal reserve bank notes. 
If silver coin and the lesser coins are excluded from this 
calculation, for the reason that there are no bank issues 
to take their place in making change, you will find that 
the "people's money" is practically unrepresented. "Bank 
money" has so nearly displaced the use of government 
money that gold coin, gold and silver certificates and 
greenbacks of large denominations are now curiosities. 

No question is raised as to the safety of these fed- 
eral reserve notes. They are good, safe money, for not 
only do they have private credit for their full face value 
behind them, but they are government obligations and 
are, therefore, as safe as government bonds. 



228 THE STRANGLE HOLD 

The real effect of the Federal Reserve System is to 
strengthen the position of the bankers. It does not in 
the least tend to remove the vital defect in our financial 
system. Federal reserve notes are a crystallization of 
bank credit, in which the security of the government is 
added to the security of the banks. These notes are a 
safe medium; but the bankers are in control of their 
issuance. The Federal Reserve Banks do not deal with 
the people. They are bankers' banks only. The privilege 
of turning credit into our national currency is, therefore, 
still in the hands of the few private citizens who control 
the banks. 

The Constitution reserves to the Federal Government 
the right to coin money. In order that all may share 
equally so important a privilege, gold is given the right 
of FREE coinage. Any one possessing gold bullion may 
take it to the United States mint and receive its full 
value in coined money. The gold coinage law is general 
in application, and confers the right equally upon all. 
If a law attempted to say that only a few, or only a cer- 
tain class, had this particular privilege, it would be 
condemned as class legislation and as being undemo- 
cratic, for under our declared principles, all men should 
be equal before the law. 

Since bank credit has almost entirely replaced gold as 
our medium of exchange, it should be issued under the 
same conditions as apply to the coinage of gold. The 
freedom from special privilege, which accompanies the 
coinage of gold, should be applied also to the minting of 
credit. Value, in all its concrete forms, is the real se- 
curity behind bank credit and all who bring value to the 



THE FEDERAL RESERVE 229 

bank should, therefore, be privileged to receive the same 
percentage of the medium of exchange thereon. 

But how completely this principle is ignored! In the 
federal reserve notes we have a crystallized form of 
bank credit, constituting a major part of our circulating 
medium. Yet these notes are issued entirely at the will 
and discretion of various groups of private citizens, the 
finance committees of banks, wholly without regard to 
individual rights, constitutional provisions, or to the dem- 
ocratic principle that government must be administered 
impartially. 

What an outcry would be raised were the government 
to mint gold bullion into coin for a certain class only. 
But compare the number of persons who have gold bul- 
lion to exchange for coin at the public mint with the 
number who go to the private mint, to wit, the bank, 
to have their securities coined into bank credit, through 
a loan which may subsequently be coined into federal 
reserve notes by the banker. 

In this private mint, which is far more important than 
the public mint, privilege exists to the highest degree. 
And besides this fact the arbiters of our fate are re- 
sponsible to no one, not even to their own consciences. 
For in all probability they do not themselves realize the 
far-reaching effects of the autocratic power whey wield. 

The effect of the Federal Reserve Act is that it in- 
tensifies the grip which the bankers have upon our whole 
industrial system. By placing the strength of the 
national government behind bank credit, through the 
issue of federal reserve notes, without taking out of the 
bankers' hands the control over the issuing of that credit, 



230 THE STRANGLE HOLD 

the Federal Reserve Act confers upon our bankers a 
privilege that is vastly more important than the right to 
the free coinage of gold. Consciously or unconsciously, 
it undermines the principle upon which our government 
was founded^ the principle of equality before the law. 
Unless this principle is upheld, no democracy can pos- 
sibly endure. 

At once the matter becomes not merely a financial 
problem, nor a mere question of banking or business 
methods, it reaches to the very bedrock of our social 
institutions, and its importance is commensurate with 
its depth. 

The Federal Reserve System, then, is at best no cure, 
it is a sedative, nothing more. It has soothed the bank- 
er's fears, and injected some confidence into the public 
mind, thus enabling us to pass through a very trying 
period in our history. But like all sedatives, it has a 
bad result. Its narcotic effect renders more difficult the 
location of the cause of our social ills — for it lulls us 
into the belief that the disease has been cured. 

Because our usual decennial panic did not occur, and 
our chronic state of money stringency has been some- 
what relieved, the belief is common that our financial 
evils have been cured ; while the truth is that the cause of 
these unfavorable financial manifestations, and of most 
of our political, industrial and social ills, remains un- 
touched. 

And, what is even worse, the system attempts to cure 
our financial ills by increasing the real defect in our 
social system. Under this act the private control of our 
medium of exchange is given a firmer grasp upon the 



THE FEDERAL RESERVE 231 

nation. The Act has rendered the money power more 
dangerous to our personal liberty, and gives it greater 
opportunity to encroach upon our national democracy. 

While the Federal Reserve Act has fallen far short 
of its purpose, it has performed a service and it has 
within itself a latent power for good. For although the 
act is not a cure in its present form, it furnishes a most 
convenient and readily adaptable instrument through 
which a real cure may be administered. 

The act should be amended by striking from the title 
the word "Reserve/* making it read, "The Federal Bank 
Act/' then the body of the act should be amended to 
conform to that title. With the addition of a few 
words to put into effect the suggestions made in Chapter 
VIII, the flaw not only in our financial system, but in 
our social system, would be removed. A simple change 
indeed and one that could be easily made to the benefit 
of all and with no disturbance to business. 



CHAPTER XV 

THE CONSERVATIVE BANKER AND HIS 
RESERVE JOKE 

THE banker is an extremely conservative person. He 
clings closely to the status quo and is fearful of 
all changes, regardless of the reasons which may 
prompt them. This attitude on his part is exactly what 
might be expected, for the banker enjoys such a secure 
and powerful position under existing conditions that any 
change seems likely to him to result in a lessening of his 
power, consequently he will oppose all changes on prin- 
ciple. 

The banking interests strenuously opposed the adop- 
tion of the Federal Reserve Act, just as they have op- 
posed many other pieces of constructive legislation. Op- 
position to change is the natural attitude of all bankers, 
but in the particular case of the Federal Reserve Act, this 
opposition was due not only to a general aversity on the 
part of the banker to any change, but also to another 
reason, a reason far stronger, and one which resulted 
in the bitter and united opposition of practically all the 
bankers in the country. 

This reason was the original proposal to make the Fed- 
eral Reserve Bank a people's bank, where borrowers 
could go directly for credit when private banks refused 
to accommodate them. The origin of this suggestion lay 
in the startling revelations of what was known as the 

232 



Till: CONSERVATIVE BANKER 233 

Pujo committee, which made a congressional investiga- 
tion of the "money trust." 

The testimony given before this committee disclosed 
the vast power wielded by a few rich men. It also 
showed up the black hand financial methods used by 
what we commonly call "Wall Street." Together the dis- 
closures shocked the country. The result was a sugges- 
tion to establish a Federal Bank open to the use of the 
people directly. 

But the mere suggestion caused such a cry of fear and 
such a frantic prediction of calamity from the bankers 
that it sent a cold chill down the spine of every business 
man. 

One can well imagine the light in which the bankers 
regarded such a proposal. The whole subject of finance 
had always been shrouded in such a veil of mystery and 
the system had permitted the bankers to command hom- 
age and compel tribute from all for so long a time, that 
the granting or denial of credit had come to be looked 
upon by them as a vested right. Naturally any sug- 
gestion which had as its object the curtailment of this 
right would meet with strong opposition. To permit 
the people to use their own credit without the permission 
of the bankers and without paying tribute to them 
seemed to them to be an invasion of their rights. The 
idea of a people's bank for this reason, aroused them 
and the result of their opposition is interesting. 

Natural history informs us that the octopus, some- 
times referred to as the devil fish, has in its anatomy an 
ink sack from which it can, when attacked, emit a black 
fluid that will confound an enemy and cover its escape. 



234 THE STRANGLE HOLD 

This characteristic seems to be common to the species, 
whether of the order "dibranchiate" or "financial." For 
by their clamorous opposition to the proposition of a 
people's bank, the banking interests succeeded in having 
the act recast. And it was cleverly recast, too, by the 
adroit hand of Wall Street, so that in its present form 
the people's bank idea was entirely wiped out, and 
every provision was turned to the banker's benefit. 

And like the octopus, those who had it recast were 
clever to cover the effect of their operations with an 
impenetrable haze of financial fiction. The effect of the 
act in its new and present form was and still is generally 
misunderstood. Not only is this true of the average lay- 
men, but also of many of the bankers. For, after the act 
had been changed so that the last vestige of a people's 
bank was removed, the opposition to it among the bank- 
ers remained. In fact their opposition was so strong 
that only the great impetus of popular pressure for 
some kind of relief, backed by the firm will of a deluded 
President, forced the adoption of this law, emasculated- 
as it was. 

The opposition of the great majority of the bankers, 
inspired by their natural conservativeness, was no doubt 
genuine. But when the features of this act are really un- 
derstood, one cannot believe that the apparent opposition 
of the big interests was ever intended as anything more 
than a counter-irritant, with the object of making the 
people adopt the law. 

Few laymen, and not even our law makers have 
given sufficient heed to the ultimate effect of this act. 
Those who uphold it do not see that under its veneer 



THE CONSERVATIVE BANKER 235 

of public good it gives the big financial interests a 
firmer grip than ever upon the business life of the na- 
tion. They have not noted that the act has put into the 
hands of these interests full control of the circulating 
medium. And so they fail to realize that the real effect 
of the Federal Reserve Act has been to give control of 
the medium, which is necessary to every industry and 
to every person, so completely into the keeping of a few 
that their power over the nation industrially, socially, 
and politically is practically complete. No political 
ruler ever wielded such an autocratic power. 

This charge is a severe arraignment of a law pop- 
ularly supposed to free the people from the strangle- 
hold of the money power. Facts and logic, however, 
make this charge. It is the only conclusion possible when 
the situation is understood. No other conclusion is ten- 
able as can be seen from the exposition of the true nature 
of the act, given in the last chapter. We saw in Chapter 
XI that a former Secretary of the Treasury considered 
it necessary to deceive the people in order to cover the 
weakness of our financial system. The super financiers 
who shaped the Federal Reserve Act into its present 
form followed this suggestion most effectively and with 
surprising results. 

The main points in the law have been explained. No 
object could be gained by following its intricate de- 
tails and it would be unwise to attempt to do so here. 
The explanation of one means by which the act has been 
made to serve the banking interests will be apparent and 
will suffice. This is the way in which the greenback, at 
one time a very much despised and a very much opposed 



236 THE STRANGLE HOLD 

type of national currency, has become highly appreciated 
by and very lucrative for the banker. 

The greenback, United States note, or legal tender 
note was an unsecured promise to pay, first issued dur- 
ing the Civil War. It certainly was an ugly duckling 
though it afforded a great refuge during the stress of 
those times. By giving these notes full legal tender 
power, the government gave them all the force that a 
government can put behind an unsecured paper currency. 
However, for nearly twenty years, starting with their 
first appearance, an unrelenting attack both as to the 
validity and value of these notes was led by the banking 
interests. At one time these attacks drove their value 
down to less than forty cents on the dollar. The strife 
continued until the bankers finally had the matter ar- 
ranged to their satisfaction. Greenbacks became avail- 
able for reserve. They were "lawful money." 

By means of the Federal Reserve Act, the banker suc- 
ceeded in turning this "people's money," as the green- 
back was called by its advocates, into a most valuable 
"banker's money," and the way in which this feat was 
accomplished was as follows: 

The Federal Reserve Act provides that the reserve of 
35%, which all Federal Reserve Banks must hold against 
deposits, can be held in either gold or "lawful money." 
Greenbacks are lawful money. By means of this sim- 
ple arrangement a miracle was wrought. Through this 
arrangement, which permits Federal Reserve Banks to 
carry their reserve against deposits in greenbacks, this 
despised paper currency became as valuable as gold. 

To judge the effect of this miracle let us take, as an 



THE CONSERVATIVE BANKER 237 

example, a little jim crow bank in a country village, 
with a capital of $25,000 distributed as follows: $10,000 
invested in building and fixtures; $1,500 in gold invested 
in Federal Reserve Bank stock, purchased under com- 
pulsion, on which the bank receives 6% cumulative divi- 
dends; and $13,150, in other securities. The bank has 
then left out of its capital $350, let us say this is in 
greenbacks. 

The bank has no deposits as yet, but as it is com- 
pelled by law to maintain a reserve equal to 7% of its 
demand deposits and 3% of its time deposits with the 
Federal Reserve Bank of its district, it prepares for 
business by sending the $350 in greenbacks to the Fed- 
eral Reserve Bank as a deposit. That leaves the till of 
our little bank as clean as old Mother Hubbard's cup- 
board ; but the customer is not going to fare as poorly as 
the dog did, even if the till is bare and the customer 
happens to be a borrower. 

It is easy to see how a bank with no money on hand 
can accommodate a depositor, but just how is this bank 
going to satisfy the borrower out of an empty till? 

This feat is easy when you know how. Listen ! Here 
comes the borrower with that humility and deference 
with which the borrower always approaches the banker 
and, by means of an eloquent appeal in which he tells 
the banker just how he is going to use the money, he 
finally succeeds in breaking through the million dollars' 
worth of dignity with which the banker surrounds his 
empty till. So he secures a loan of $1,000 for 90 days. 
The banker takes the borrower's note and securities and 
hands him in exchange a pass book with the date and 



&SZ THE STRANGLE HOLD 

$1,000 written on the credit side. For the purpose of 
turning that daub of ink into money, he very graciously 
gives him a check book. 

It usually thrills one with a sense of importance to 
be handed a nice new check book by the banker. 

The borrower now has one thousand dollars' worth of 
the medium of exchange, bank credit, with which to do 
business, and the banker has one thousand dollars in 
personal credit, a note, at, say, eight per cent interest 
backed by good security. The question now arises, how 
are the checks which the borrower will draw going to be 
paid? The bank till being empty, one naturally won- 
ders where the money is to come from. At first sight 
this seems to be rather a complicated problem, but when 
one understands the tricks of banking it becomes very 
simple. 

Without loss of time the banker takes that $1,000 
note to the Federal Reserve and discounts it at 6%. 
He draws out only $350 in federal reserve notes, thereby 
increasing his deposit of $350 already made with the 
greenbacks by $650, which gives him a credit of $1,000 
as a reserve. So he goes merrily on receiving deposits 
and making loans. 

Deposits of cash will probably equal or exceed with- 
drawals, so the $350 in federal reserve notes which he 
has taken out of the $1,000 note will give the banker 
ample cash funds for paying checks. 

Let us follow this operation in frenzied finance and 
figure the yearly profit made possible for the banker 
through the proper use of a few greenbacks which his 
predecessor so despised. 



THE CONSERVATIVE BANKER 239 

On the note discounted, the banker profits by the 
difference between the 8% the note bears and the 6% 
for which it was discounted, or 2% on $1,000 which for 
one year would be $20. As this bank is required to 
carry a deposit in the Federal Reserve Bank equal to 
only 7% of its own deposits, and as it now has de- 
posited there $1,000 it can carry deposits up to 
$14,285.71, for $1,000 is 7% of that amount. It can, 
therefore, create this amount of deposits by making 
$13,285.71 additional loans on which it will collect 8% 
or $1,062.85, which added to the $20.00 made on the 
note for $1,000 which is kept discounted makes $1,082.85 
in all. 

This income on each $1,000 of deposit with the Fed- 
eral Reserve is not so bad a piece of business when 
one considers that the bank has not one cent invested. 
Its whole capital stock was put into income property 
or securities except the $350 in greenbacks, which were 
traded for federal reserve notes by discounting a pri- 
vate note. These notes are held by our little bank as 
CASH while the $350 in greenbacks are held by the 
Federal Reserve Bank as RESERVE. From the stand- 
point of "good banking" this arrangement has two ad- 
vantages. It helps overcome the limit set by the gold 
standard and at the same time is not unprofitable to the 
banks, but from the standpoint of common sense to hold 
one piece of paper as reserve against another piece of 
paper when both pieces of paper are guaranteed by the 
same government look like a joke. 

The foregoing income is obtained by figuring that all 
the deposits made with this bank are demand deposits,. 



240 THE STRANGLE HOLD 

against which it must hold a seven per cent reserve. A 
reserve of but 3% is required to be held against time 
deposits, and, consequently, were all deposits time de- 
posits, the bank would be able to lend over twice as much 
of its credit. But without stopping to figure how much 
could be made on time deposits, let us see what could be 
earned by all the banks on all the greenbacks issued. 

This problem of course is a hypothetical one, for all 
the greenbacks outstanding are not held as reserves by 
the Federal Reserve banks, and the problem assumes 
that they are. It is, however, not unreasonable to sup- 
pose that they could be so held, and, therefore, the 
problem is of interest in that it exposes the fallacy of 
the reserve system and shows a possible situation under 
the Federal Reserve Act. 

The reserve requirements of banks, which are mem- 
bers of the Federal Reserve System, varies according to 
the location of the bank. Banks in central reserve cities 
are required to carry with the Reserve bank a credit of 
not less than 13% against their demand deposits, re- 
serve city banks must have a balance of not less than 
10%, other banks get off with 7%, while all are re- 
quired to carry only 3% against time deposits. Let us 
take the average of reserve against demand deposits as 
10%, and consider all the member banks as constituting 
one bank. 

Then for every $10,000 of demand deposits carried 
this big bank would be required to have a credit balance 
with the Federal Reserve of $1,000 or 10%. This bal- 
ance may be created by depositing money or discountable 
paper, but the Federal Reserve must hold a reserve of 



THE CONSERVATIVE BANKER 241 

85% against these deposits in either gold or 'lawful 
money/' 

To comply with the law then the Federal Reserve 
holds, we will say, in greenbacks, for they are lawful 
money, $350 against every $1,000 deposited with it 
by the member banks. Since every $350 in greenbacks 
satisfies the reserve requirement for credit with the Fed- 
eral Reserve then every $350 worth of greenbacks per- 
mits the member bank to carry $10,000 in deposits. 

Now let us see how much bank credit can be issued in 
the form of loans by the member banks through using 
the full issue of greenbacks as the only reserve. 

There are outstanding $346,681,000 in greenbacks 
and as the banks can issue ten thousand dollars of bank 
credit for every $350 held in the Federal Reserve, 
divide the $346,681,000 by 350 and multiply by 10,000. 
It gives a little less than ten billion dollars as the amount 
of bank credit which can be issued against legal tender 
notes, the despised greenback as the sole reserve. 

If you can now get hold of one of these precious 
greenbacks, you will see that they are not redeemable in 
gold or anything else and the government will not even 
accept them for customs duties. 

It is safe to say that not one person in a million 
knows or cares whether there is a gold reserve behind 
them or not. 

Their value rests entirely on the belief that they will 
be accepted from us at the same value at which we 
accepted them. That is their sole value is CONFI- 
DENCE, 

The banker by putting something over three hundred 



242 THE STRANGLE HOLD 

million dollar's worth of this form of confidence through 
the magic process of the Federal Reserve mill makes 
these pieces of paper carry ten billion dollars' worth 
of his credit, which is also confidence. 

In this arrangement we have conclusive proof of the 
fact that our development has outgrown the gold reserve 
system for by this use of greenbacks as reserve the 
gold reserve idea is discarded. It also proves the cor- 
rectness of our whole contention. 

If ten billion dollars' worth of bank credit can be 
issued with nothing back of it but CONFIDENCE why 
not thirty or fifty or for that matter a hundred billion 
dollars' worth? 

The point is to be sure of the confidence. As long 
as that is safe there is no limit. 

By making the people know that every loan that every 
bank makes is perfectly safe the maximum of confidence 
would be secured and, consequently, our medium of 
exchange would be perfected. 

This use of greenbacks as reserve is a powerful argu- 
ment in favor of the suggestion made in this book for 
the reform suggested certainly would secure the maximum 
of confidence. 

Instead of having ten billion of our medium of ex- 
change based on green paper and the rest on "gilt" 
paper and then allowing private interests to dictate its 
use, why not have it all based on the solid rock of sure 
public confidence and permit everybody to use it on equal 
terms? Is there any reason? 

Again, since all financial reform has always tended 
toward and striven to reach the goal of complete public 



THE CONSERVATIVE BANKER 243* 

confidence why not put into effect a reform which will 
reach it and which will always hold it ? 

The fact that using the greenbacks as reserve is prof- 
itable to the banker is no argument either in favor of 
or against that arrangement so no criticism is intended 
by showing it. The only object is to complete the argu- 
ment that the people's money has been made a profitable 
banker's money. 

We have seen that on $350 of greenbacks held as 
reserve the banker can collect as interest on every 
$10,000 of his credit issued an average of say 7% 
or on the ten billion dollars' worth about seven hundred 
million dollars per year. We have also noted that the 
banker has nothing invested. When one considers that 
this income is made entirely out of the people's laws and 
the people's confidence, without any investment whatso- 
ever on the part of the banker, the Wallingford stories 
seem not only probable but quite tame. 

If the foregoing seems to be an exaggerated picture 
of existing conditions let us pursue the story and then 
prove up by a few figures taken from government docu- 
ments. 

The Federal Reserve banks are supposed to hold a 
reserve of 40% in gold against federal reserve notes 
in actual circulation. The amount of gold held Decem- 
ber 1st, 1919, was $1,148,724,000 against which was out- 
standing $3,059,652,000 in federal reserve notes. This 
apparently is a gold reserve of 38% and only 2% below 
what the law requires. Besides this issue against gold 
reserve the Federal Reserve banks can issue federal 
reserve BANK notes to the full value of all govern- 



244 THE STRANGLE HOLD 

ment bonds bearing the circulation privilege which they 
have with the United States Treasurer, and small bills 
against United States certificates of indebtedness, as 
authorized by the act of April 23rd, 1918. 

Besides all this paper secured by paper there are the 
national bank notes secured by government bonds or 
an issue in December, 1919, of a little over 990 million 
dollars secured practically by paper only. Adding this 
amount to $3,059,652,000 of federal reserve notes gives a 
little over four billion dollars of paper money and prac- 
tically the only gold held for its redemption is the 
$1,148,000,000 in the Federal Reserve or about 28%. 

All this paper is spoken of as our national currency 
but altogether it constitutes but a small portion of our 
real currency or medium of exchange. 

There are, in round numbers, 30,000 banks, state and 
national, doing business in this country. The deposits 
in these banks amount to about 33 billion dollars. If 
our financial system is really on a gold basis all these 
deposits are payable in gold. So we have a little over 
one billion of gold with which to redeem 33 billion of 
bank credit plus 4 billion of paper money, or, 37 bil- 
lion of the medium of exchange. By dividing the $1,- 
148,000,000 by the 37 billion it shows we have a reserve 
of about 3% of gold supporting our circulating medium. 

That is, for every $100 of paper money and bank 
credit, which practically makes up our entire medium 
of exchange, there is $3 in gold. But you say the 
Comptroller's report shows there are about three billion 
dollars of gold in the United States although but $1,148,- 
000,000 is on deposit with the Federal Reserve. 



THE CONSERVATIVE BANKER 245 

Yes, and there are also 25 billions of government 
bonds outstanding besides billions upon billions of pri- 
vate bonds, notes and accounts, all payable in gold. The 
amount of these debts payable in gold cannot be known 
but it is safe to say they amount so far into the billions 
that the percentage of gold to bills payable in gold in 
the United States would not exceed 1% or $1.00 on the 
$100, This is a rich country and holds about one-half the 
world's supply of gold. If we could figure out the per- 
centage of gold to bills payable for all the countries 
which have based their system of exchange on the gold 
standard we would require a microscope to find the 
answer. It would probably not exceed fifty cents on 
the hundred dollars. 

If an ordinary mortal should promise to pay us $100, 
when we knew he possessed but fifty cents and we knew 
full well that he could not possibly get any more we 
would, look upon him with great distrust, even with dis- 
gust; but when the same promise under the same condi- 
tions comes from the banker we accept it. 

Most of us can imagine, or have seen, a group of 
little girls "playing lady." With an old skirt of their 
mother's, or of their big sister's, they pretend that they 
are grownups, and that a corner in the attic is their 
home. One makes believe that she is Mrs. So and So, 
and another is Mrs. Somebody Else who comes to call. 
The whole point of the game is to "make-believe." 

When we can escape from the magic spell of gold 
and cast off the fear of all things financial, the force 
of the story here presented will be readily recognized. 
The provision of the Federal Reserve Act which permits 



246 THE STRANGLE HOLD 

the reserve against a promise to pay to be carried in a 
promise to pay makes a farce out of the gold standard 
and the whole reserve system is shown to be a game of 
"make-believe" and becomes a joke. 

If the gold reserve idea^ false as it is seen to be, were 
necessary to a proper working of our exchange system, 
it would be both unwise and unpatriotic to attack it, for 
naught but harm could result. The true condition, how- 
ever, is the exact opposite for it is not at all necessary 
and besides it is robbing the whole nation of liberty and 
equality as well as prosperity and happiness. 

This false promise to redeem in gold has but one 
result. It continues the strangle-hold of private inter- 
ests upon our national life by bolstering up private con- 
trol over the medium of exchange. It is a smoke screen 
which hides the truth that our financial system is nothing 
but a system of bookkeeping. The bank is a clearing 
house for credits, nothing else, and it will be a much 
more useful institution when the truth is recognized and 
the suggested reform is put into effect. 



CHAPTER XVI 
FOREIGN EXCHANGE 

THE problem of foreign exchange exhibits a phase of 
finance that has of late been vividly called to the 
attention of the public. The variation in the value of for- 
eign money as measured in dollars decides the course of 
foreign exchange. The question on this subject is, what 
causes this variation? 

It is a question that is little understood even by those 
who handle exchange. Obviously, then, it is understood 
still less by the general public. As a consequence, a 
number of different explanations for this variation in 
the course of foreign exchange have been given. Let 
us examine the chief explanations and see whether they 
are correct. 

Most bankers in trying to explain the course of for- 
eign exchange, will assign as the main reason, if not the 
entire reason for the price of exchange, the difference 
in the gold reserve held by the various countries. The 
banker, who is accustomed to deal in foreign exchange, 
ought to know more about the subject than others who 
deal in exchange only infrequently or never. To deter- 
mine whether or not the banker's explanation is correct 
let us examine the relationship existing between gold 
reserve and the price of exchange. 

It has already been seen that in the United States, 
the richest country in the world, there exists about thirty- 

247 



248 THE STRANGLE HOLD 

three billions of bank deposits and four billions of paper 
money resting on a little over one billion of gold held 
as reserve or something less than three per cent. Euro- 
pean countries are not advertising the amount of their 
gold reserve just now, so there is no authentic informa- 
tion at hand on the subject. It will be seen that the 
suggestion is so ridiculous, however, that we do not 
need exact information in order to show the fallacy of 
connecting the price of foreign exchange with the gold 
reserve. 

Let us suppose that England, for instance, has no 
gold at all. In the United States each dollar has about 
three cents in gold behind it. The par value of an Eng- 
lish pound in our money is $4.86. Multiplying this by 
.03 gives about fourteen and one-half cents as the worth 
of gold behind the equivalent of a pound in our money. 
Since we have assumed that there is no gold behind the 
pound in England it is worth as much less per gold 
reserve as there is less gold behind it than behind its 
equivalent. Since there is 14% cts. worth of gold behind 
$4.86 of our money the pound is only worth that much 
less than its par value, so it is worth, then, $4.86 minus 
14% cts. or $4.71%. If the gold reserve sets the value 
of a nation's medium of exchange and we allow the 
maximum value behind one and the minimum behind the 
other, the difference should certainly be a conservative 
estimate of the ratio of value. 

Since the pound sterling is quoted at the present writ- 
ing at $3.56, and has been less, and according to the 
difference in gold reserve it should be worth $4.71%, 
there is a difference of $4.71% minus, say, $3.56 or 



FOREIGN EXCHANGE 249 

$1.15% unaccounted for by gold reserve. It is plain 
there must be some other reason than gold reserve for 
this difference of $1.1 5% in exchange value. In order 
to locate the cause of this difference of $1,151/2 we must 
determine what other value is behind the dollar and com- 
pare that value with the value behind the pound. 

On examination we find that the English monetary 
system is quite similar to our own. The English law 
requires that all Bank of England notes must rest on 
a reserve of gold or government obligations. These 
Bank of England notes constitute the paper money used 
throughout Great Britain the same as federal reserve 
notes, national bank notes and greenbacks constitute the 
paper money used in this country. Our paper money 
rests on practically the same kind of a basis as the 
Bank of England notes, that is gold reserve and gov- 
ernment obligations. So the only difference in value 
would be the difference in gold reserve and the value of 
the different government obligations. 

The gold reserve is a farce in both instances and as 
we have seen, accounts for but 14% cts. on the value 
of the pound, under the most favorable circumstances, so 
it may be ignored in the search for real sustaining value. 

On examination we find that British government obli- 
gations are more nearly worth par in Great Britain than 
American government obligations are in the United 
States. The value behind British paper money then is 
practically the same as the value behind our own. 

As in the United States, so in Great Britain, bank 
credit constitutes the bulk of the medium of exchange. 
It is issued in both countries in practically the same 



250 THE STRANGLE HOLD 

way, on notes and mortgages, and, therefore, the values 
behind it are as good in one country as in the other. 
The difference of $1.15% in the exchange value of the 
pound cannot, therefore, be found in the sustaining value 
behind either the paper money or the bank credit. 

John Bull's note is secured in the same way as Uncle 
Sam's. The fact that John's note is at a discount when 
measured in Sam's money cannot, therefore, be explained 
upon the basis of a difference in security. 

In this case, then, it is plain that the gold reserve 
assigned by the banker as a reason for the price of ex- 
change is erroneous but as there is no difference in other 
sustaining values the real reason has not been found. 
Let us now examine, for instance, the exchange value 
of the money of the other two large commercial coun- 
tries of Europe, the franc and the mark. 

Both the French and the German monetary systems 
have progressed beyond the folly of gold reserve. The 
paper money of both France and Germany is issued in 
the first instance through the Bank of France and in 
the second through the Reichsbank on the assets of the 
bank as security. In both instances it is issued in prac- 
tically the same way that bank credit is issued in Eng- 
land and in this country. 

The only difference between the paper money of these 
two countries and the bank credit of our own is in its 
form. When a French or German business man goes 
to the bank and puts up his note and securities for a 
loan he comes away with a handful of paper money. 
In this country the loan he receives from the bank is 
represented by a daub of ink in a bank book. 



FOREIGN EXCHANGE 251 

Practically the only difference is in the form of the 
banker's promise to pay. In those countries a banker 
hands out his I. O. U. in the form of a bank note and 
here in the form of an entry in the customer's pass 
book. If the banker here would hand us national bank 
notes and we would use them instead of his giving us 
credit on the bank's book, for us to transfer by means 
of a check, the system would be almost identical with 
that of those continental European countries. 

Since the system of issuing the media of exchange 
in all three countries, though outwardly somewhat dif- 
ferent, are really almost identical in principle, there 
cannot be much difference in real value between the 
media of exchange unless there is a difference in the 
security behind the bank loans. On examination, we find 
the securities which are put up for bank loans are sub- 
stantially the same in form and effect and are practically 
equal in value, so the promises to pay issued by the dif- 
ferent banks should be the same in value. But today 
we find the franc selling at about fifteen to the dollar, 
while the par ratio is a little over five to the dollar; and 
we find the mark, with a par value of 23.82 cents, sell- 
ing for the time being at one and one-half cents. This 
discrepancy clearly indicates, then, that the difference 
in the price of exchange cannot be attributed to a differ- 
ence in system or to a difference in the value of the 
security behind the media of exchange of the different 
countries. 

Since the banker's explanation of difference in gold 
reserve does not explain and we find no difference in 
other value, let us turn to another attempted explana- 



252 THE STRANGLE HOLD 

tion. There is one which bases the difference in the 
price of exchange upon the volume of the medium in 
circulation in the various countries, or rather, upon the 
ratio of inflation. 

The first country called to mind in this connection is 
Russia. Here inflation has been carried to such an 
extreme that the Russian rouble is almost valueless at 
home. Naturally, then, it is even less valuable in for- 
eign exchange ; and in fact it has so little value that it is 
no longer quoted. 

This would seem to demonstrate the truth of this 
second reason given for the price of exchange. How- 
ever, even in the case of the rouble, it is not the only 
reason; the value of credit money depends upon the 
stability of the government and the institution issuing 
that money. Russia at present has no government worthy 
of the name. The effect is the same as the effect of 
over-inflation; it reduces the price of the rouble in for- 
eign exchange. To over-inflation, then, it is not per- 
missible to assign the whole of the abnormal lack of 
value of Russian exchange. 

It would seem, therefore, that the ratio of inflation, 
while quite possibly one of the factors affecting the price 
of exchange, is by no means the only factor. This con- 
clusion is brought out still more forcefully in the case 
of exchange on England, France, and Germany. For 
in these countries their medium of exchange is inflated 
little if any more than ours is in this country. 

In the leading European countries the rise in the cost 
of living since 1914 has been no higher than it has 
been in this country. In 1914, however, exchange 



FOREIGN EXCHANGE 253 

between these countries and the United States was at 
par or practically so. And to account for the present 
value of the franc, for instance, on the inflation theory, 
the cost of living in France would have to be relatively 
three times as high as it is in this country, because the 
franc is about one-third par. 

Now it is true that, on account of the adverse rate of 
exchange with the United States, goods imported from 
this country to France are three times as high as nor- 
mally; for the francs with which they are bought are 
selling at one-third their normal exchange rate, so in 
figuring the cost of living, these goods must be left out 
of the calculation. 

At present it costs the average American family of 
of three, we will say, $100 a month to live in this 
country. At par this sum would be equal to 500 francs; 
a sum probably greater than that which the average 
French family spends for living. If inflation, however, 
made the franc worth what the exchange rate quotes, 
then it would cost the average French family 1500 francs 
per month. 

The same reasoning applies, only with greater empha- 
sis, in the case of Germany. In order to account for 
the German exchange rate on the ground of inflation, 
the cost of living there would have to be over fifteen 
times what it was in 1914. Taking the mark at its pres- 
ent exchange value, a family of three would have to 
spend at present about 7,000 marks monthly for living 
on the same scale as the average American family of 
the same size. 

While the difference in inflation, then, is to some 



254 THE STRANGLE HOLD 

extent a factor in determining the present abnormal 
rate of exchange, it is at most only a minor factor. For 
the fact is that, exclusive of goods which must be im- 
ported, the cost of living in England, France, and Ger- 
many is relatively little if any higher than it is here, if 
we figure their money at par. Or, in other words, Eng- 
lish money, French money, and German money are worth 
in those countries as much as they ever were and as much 
as our money is here. 

What then is the real cause for the difference in 
exchange rates ? We have seen that the reason advanced 
by the banker, the difference in gold behind the money of 
each country, is not correct and that there is practically 
no difference in the security behind each. We have also 
noted another reason, the relative inflation, and find it 
to be inadequate to explain the present price of exchange. 
What then is the real explanation ? 

There are two factors that account almost entirely 
for the present state of foreign exchange. The first 
of these is the balance of trade, and the second the 
position of the foreign exchange speculator. 

Trade can be compared to a clearing house operation. 
If I ship you one hundred barrels of flour worth ten 
dollars a barrel and you ship me ten barrels of dye 
stuff worth one hundred dollars a barrel, the transaction 
clears itself. 

It may happen, however, that you buy the flour from 
me, but ship me in return goods worth only a part of its 
value. Two possibilities arise at this point. Either you 
will pay me the balance in money, or I will trust you 
to pay me later. 



FOREIGN EXCHANGE 255 

Perhaps you are unable to pay the balance in money 
immediately. If I have perfect confidence that you 
will pay me in goods or in money at a later date, then 
it will be to my advantage as well as to yours to let you 
have the flour. For to do so will stimulate trade. On 
the other hand, to refuse to let you have the flour will 
harm me as well as you. For the result of the refusal 
will be a lagging of the flour trade and a decline in the 
price of flour. The slump in flour will cause wheat to 
drop, resulting finally in a falling off in production 
which will throw men out of employment, cause a reduc- 
tion in wages, and general loss and discomfort to every- 
body. Obviously, then, I should be inclined to trust you 
for the flour. 

But let us see why I do not trust you for the flour. 
If in this supposed case I am an American merchant 
and you are a merchant in Europe we will see what the 
situation actually is today. 

Europe has been depleted by the war, and now stands 
in need of food and raw materials from us. At present 
the merchants of Europe cannot pay us for the materials 
they need, either in goods or gold. By means of our 
goods, however, those people could rise to their feet all 
the more quickly, and they would soon be able to pay 
us. We want to let them have the goods but here again 
the inefficiency of our financial system shows up to block 
business, and our failure to sell is detrimental, not only 
to them, but to us also, and is due to the fact that our 
financial system is not elastic enough to permit us to 
carry the credit. 

Credit, as has already been noted, is made up of con- 



256 THE STRANGLE HOLD \ 

fidence and time and the time is in direct proportion to 
the confidence. Little confidence, little time, therefore, 
the reason why bank credit it limited to 30, 60, and 90 
days is because our banks are not sure enough of public 
confidence to let their credit out for a longer time. Bank 
credit is our medium of exchange — the means of carry- 
ing on trade — and the exporter can not use such short 
time credit for he must give his customer a longer time 
than 30, 60, and 90 days. 

Because of the disrupted condition in which the war 
has left European industry the merchants there must 
have long time credit and our banking system because 
of lack of public confidence cannot carry it. 

The Edge Act was passed as an amendment to the 
Federal Reserve Act in order to overcome this difficulty 
and under it the bankers are forming a one hundred 
million dollar Foreign Trade Financing Corporation so 
as to be able to extend the credit necessary. 

The exporter is in exactly the same position as the 
farmer. He cannot use 30, 60, and 90 day money. He 
must have longer credit and since our banking system in 
its present condition cannot extend it this special insti- 
tution is being gotten up for his benefit just as the 
Farm Loan Act was gotten up as an attempt to over- 
come the farmer's difficulties. 

The Edge Act and the corporations formed under it 
like the Federal Reserve and the Farm Loan Acts are 
cumulative evidence that all financial reform is seeking 
to accomplish the result which can be accomplished by 
the remedy suggested in this book. 

Our foreign trade suffers from the same old defect — 



FOREIGN EXCHANGE 257 

the false promise to pay gold, and a lack of confidence 
in the bank, due to private control. It is, once more > 
merely a repetition of the same old flaw. The situation 
that exists is the same as when lack of transportation 
facilities causes a freight blockade. 

Here, then, we come back again to that flaw which 
is at the root of so many other evils, THE SELEC- 
TION OF A COMMODITY AS A MEDIUM OF 
EXCHANGE. It has been shown how this act, while a 
natural step in the evolution of trade, proved to be a 
mistake and has become the basic flaw in our whole social 
system. It has limited man's activities by limiting the 
volume of the medium by which his activities have 
always been conducted. In this way it has at all times 
subjected all industry to the will of the few who con- 
trolled the commodity used as an exchange medium. 

This flaw has always caused and is still causing most 
of man's economic troubles, one of which is the present 
deplorable condition of our foreign trade and shipping 
business. 

Business can be carried on only by using the medium 
of exchange. If, at any time, this medium cannot be 
had in sufficient quantity, the business must wait until 
it is supplied. The fact that the medium is limited today 
by the supply of a single commodity, gold, brings with 
it the natural effect that if the gold-supply is inade- 
quate, business must wait until there is enough gold to 
carry through the exchange. It amounts to the same 
thing as waiting until a car is obtainable before goods 
can be shipped. 

Now it is true that we no longer limit our medium of 



258 THE STRANGLE HOLD 

exchange to the use of gold, since we also use paper and 
bank credit. We have greatly expanded our medium of 
exchange, for domestic purposes. Similarly every other 
gold standard country has expanded its medium for the 
same purposes, and by similar devices. But gold still 
remains the only universally accepted medium of ex- 
change, and, consequently, the only means of settling 
international balances. 

By making gold the basis of our medium of exchange 
at home, we have piled on it a mass of paper money and 
credit, which we promise to redeem in gold. Although 
we know this promise cannot be fulfilled, some gold must 
be kept stored away in vaults, so that through a complex 
system of reserves we can hypnotize ourselves into be- 
lieving it to be true. Through the juggling of reserve 
requirements we have already stretched the little truth 
there is in the gold redemption promise to a point where, 
it is so thin that, any one can see through it, so there is 
real danger in stretching it any further. 

In foreign exchange, therefore, we have a very intri- 
cate problem: the problem of getting the exchange 
mechanism big enough to carry our exchange operations 
and still keep it on the narrow-gauge gold track. All 
our gold supply is now used as the basis of credit at 
home. If we ship gold out of the country our reserve 
shrinks, and to get things back on balance, we must 
reduce our credit. But the percentage of gold reserve 
behind credit has become so small, or in other words, 
there is so much credit piled on so little gold, that a 
comparatively small shipment of the metal requires a 
very considerable curtailment of credit. This means a 



FOREIGN EXCHANGE 259 

contraction in the medium of exchange, and we know 
only too well the results of such an act. 

The whole situation reminds one of the game of "jack- 
straws/' or a similar game played with cards, where the 
deck is spread roughly on the table with two cards form- 
ing a house set on top of the pile. The object of the 
game is to see how many cards can be withdrawn with- 
out shaking down the house. And the object of the 
financial game, or the problem for some super-financier 
is: how can enough gold be pulled out from under the 
pile of paper money and credit at home to settle foreign 
trade balances, without shaking down the structure of 
credit ? 

At first sight this might seem to be a question, at pres- 
ent, for European countries to answer, but before we 
proceed much further it will be shown that it is our prob- 
lem. 

We shall not attempt to answer this question as above 
stated but it might be suggested, that if instead of keep- 
ing up the reserve bluff, we should put one hundred per- 
cent confidence behind our paper money and our bank 
credit, by the simple means of public control already 
explained, we could extend credit where credit was due 
and revive our drooping foreign trade. We would not 
need foreign trade financing corporations, nor any of 
the other devices intended to accomplish this purpose. 

And here we come to the second factor determining 
the price of exchange. The first factor, the one which 
plays the larger part in determining the exchange ratio 
of foreign money, is the balance of trade. The second 
factor is the speculator, and the speculator comes into 



260 THE STRANGLE HOLD 

the field only because the medium of exchange is so 
limited that foreign trade, like agriculture, cannot be car- 
ried on through the legitimate channels of credit. 

Europe has been depleted by the war. Property has 
been destroyed, factories dismantled, material wasted, 
and business organization disbanded. Great quantities 
of raw material, machinery, food, etc., are needed for 
rehabilitation. Europe has no gold with which to pay 
for these things, and the credit of our bankers with its 
time limit of 90 days cannot be issued for a time suffi- 
ciently long to permit our exporters to get goods back 
in return for those shipped. 

Some other way of payment for these exports must 
therefore be found. Gold cannot be used in payment, 
for the lack of confidence in banks, due to private con- 
trol, keeps the gold buried in vaults to make good the 
gold payment bluff. The only way left open is to go 
to the speculator. 

The American exporter takes the foreign purchaser's 
acceptance, or his drafts, or checks on a foreign bank, in 
payment for the goods. He cannot use these at his bank 
for his credit is limited by the banker's short time money, 
consequently he must sell these drafts to raise current 
funds so he goes to a speculator. 

This involves selling the foreign credit at a discount, 
&nd since the greater the export trade, the greater the 
supply of those instruments of credit received and 
offered for sale, consequently the greater the discount. 

And so the value of foreign exchange depends upon 
the price the speculator will pay for it. 

Now the speculator's price will depend, not upon the 



FOREIGN EXCHANGE 261 

intrinsic value of the foreign credit, but upon the amount 
of it offered and the state of the money market. In 
other words, the price of "call money" in New York. 
The rate on "call money" then is the barometer not only 
for the prices of stocks and bonds, but for the price of 
foreign exchange. It is evident then that the discount 
rate fixed by a committee of New York brokers controls 
the price of foreign exchange and through it the volume 
of foreign trade, which in turn, affects the price of our 
exports, especially wheat and cotton.* 

There are, therefore, two valid reasons why foreign 
exchange rates vary. The first factor is the balance of 
trade. When we export more than we import, that is, 
when the balance of trade is in our favor, there is created 
a demand for credit to the foreign purchaser. To obtain 
this credit the foreign purchaser offers his local credit in 
terms of the money of his location. This foreign credit is 
good but, like the farmer's credit, must run for more than 
ninety days so it is discounted to the speculator by the 
exporter because his bank is too weak in public confi- 
dence to carry it. When, as is the case today, there is 
much of this foreign credit and call money is high, the 
value of foreign credit goes down just as stocks go 
down, and all other prices tend downwards. 

But what is the effect of this condition on the foreign 
customer? The greater the discount, the less his credit 
is worth to the exporter. The latter, then, must either 
raise his prices in terms of the foreign money, or quote 
them in terms of domestic money. In either case the 
foreign customer must stand an increased cost. This 



*See Appendix, page 307. 



262 THE STRANGLE HOLD 

cost increase is due to the discount which the speculator 
demands for turning foreign credit into domestic credit 
and not to any increase in the selling price of the goods, 
nor in the profit to the American producer. 

The result is that this discount on foreign credit cuts 
down our export trade, because it continues to increase, 
without profit to the producer until the price of our 
goods to the foreign customer becomes prohibitive. He 
has to stop buying. 

It is of the utmost importance to notice in this con- 
nection that the fall in exchange does not injure the 
foreigner so much as it injures ourselves. We are anxious 
to sell goods to them but the trade is stopped because our 
financial system is not big enough and strong enough 
to carry the exchange. 

The same condition is presented as would exist if our 
shipping business were confined to the use of wooden 
tubs such as Columbus used. We are using a weak and 
antiquated system of finance which causes demand to 
automatically raise the price of our goods so high that 
other people cannot afford to pay for them. 

This fall in exchange value puts a break on foreign 
trade just as a rise in the interest or discount rate puts 
the break on domestic business. 

Again, we see the gold redemption promise and the 
private control which it fosters as unyielding opponents 
of prosperity and business expansion. It puts our in- 
dustries and commerce in a strait-jacket and by bind- 
ing our financial system to the service of private inter- 
ests reduces our efficiency and retards our development. 
The gold payment promise is a molock against which 



FOREIGN EXCHANGE 26S 

the banker is as helpless as the rest of us. Prosperity 
depends on business and business consists of exchange. 
We must make the medium big enough and strong 
enough to carry all that is offered just as we want a 
merchant marine big enough to carry our goods. 

It is impossible to over-emphasize the fact that the 
abnormal rates of exchange existing today are more of a 
disadvantage to us than to foreigners, although they are 
apparently in our favor. 

The fall in the price of exchange is generally sup- 
posed to militate against the interests of the foreign 
people by making them pay high prices. In reality it 
is just the opposite. It shuts their doors to our export 
trade but opens wide our door to imports. 

The fall in the price of exchange operates in two 
ways against us. By making our goods dear in their 
money it shuts off our export trade and by making their 
goods cheap in our money it booms our import trade. 
This condition is just the reverse of the one desired. 

To illustrate this point let us take the cotton trade 
as an example. Europe was our best customer in this 
line. When the war came and this market was closed 
there was a big slump in the price of cotton. The dis- 
tress of our cotton growers at that time is quite memor- 
able. Government purchases during the war relieved 
the situation, but now the price has slumped again be- 
cause our foreign market cannot be restored on account 
of the exchange situation. 

Take cotton that is worth say 40 cts. per lb. as it was 
in the spring of 1920, and say it costs 3 cts. to get it 
to England making the price in England without profit 



264 THE STRANGLE HOLD 

for the seller 43 cts. per lb. The exchange rate of 
$3.50 per pound sterling for example made the price of 
cotton in England about 60 cts. per lb. And England 
naturally curtalied purchases to the minimum. 

But note how the exchange rate affected Germany 
which would have been and still would be a very large 
buyer of cotton if our financial system permitted. The 
German mark, normally worth 23.82 cents in our money, 
has now fallen to around 1.5 cents, because the balance 
of trade is against Germany. This rate of exchange 
would make cotton costing 40 cents per pound in this 
country with a 3 cent freight rate cost in Germany 
almost 27 marks per pound or at the pre war dollar 
price of the mark $6.43 per lb. That is cotton that 
is worth 40 cts. per lb. here with a, 3 ct. freight rate, 
is worth at the present price of exchange, $6.43 per 
pound in German money. Under such circumstances 
it is quite evident that Germany even though in great 
need of it will buy but little cotton. 

Other European countries are shut out from buying 
our goods for the same reason as England and Ger- 
many are. 

The foreign exchange situation is an illustration of 
the effect of our short time and shaky credit upon our 
foreign trade. The medium of exchange supplied by 
our banks under private control is not able to carry it. 
Our exporters are shut out of the bank for the same 
reason as the farmer always has been, and the auto- 
mobile dealer recently has been. Through the weakness 
of our banking system legitimate business is driven to 
seek the speculator for financial relief. 



FOREIGN EXCHANGE 265 

Foreign exchange would practically come to par, and 
our export trade would be flourishing if our financial 
system were enlarged by the method suggested. This 
change would help the shipping business, the farmer, 
and everybody else. The Edge Act attempts to ac- 
complish the same object but only by doctoring a 
symptom. A cure can be accomplished in a practical 
way by adding thirty words to the Federal Reserve Act 
as suggested. 



CHAPTER XVII 
NATIONAL EFFICIENCY 

LABOR through trade supports and advances civili- 
zation. A means of producing labor and carrying 
on trade is, therefore, necessary. The only efficient way 
so far found is by rewarding effort. Slave labor proved 
inefficient because there existed a lack of incentive to 
work on the part of the slave. It consequently follows, 
that the better, safer and more accessible the means used 
to reward labor and conduct trade, the greater will be 
the civilization produced. 

Since the efficiency of a nation depends primarily 
upon its trade and since trade cannot be conducted 
without the medium of exchange which is the present 
recognized form of producing labor and conducting 
trade, therefore, if the medium of exchange is not to be 
obtained the man power lies idle and resources remain 
undeveloped. Such a condition must exist until the 
medium of exchange is at hand to bring labor and the 
natural resources of a country together for the produc- 
tion of those things which improve living conditions. 

But despite the great part that money or reward of 
effort has played in the development of the world's 
civilization little scientific study has been made of it. 
Although trade and commerce have been given a great 
deal of attention very little unbiased study has been 
applied to the medium so essential in carrying on the 

266 



NATIONAL EFFICIENCY 267 

process of trade. Most improvements in the medium of 
exchange have been the result of the slow process of 
evolution due to self interest, or to accident. 

It is hardly possible to give too much attention to 
the elements necessary in an efficient means of reward- 
ing effort and conducting trade. 

It is evident that a financial system which for any 
reason is so restricted that it does not bring together 
the man power and the resources of a country will retard 
development. The effect is similar to lack of trans- 
portation facilities. 

The medium of exchange must not only be safe and 
elastic but it must be available for use at all times. The 
greater the safety, elasticity and availability the greater 
will be the efficiency of the medium of exchange and the 
well being of the people will be in proportion. 

It follows, then, that the different degrees of efficiency 
displayed by the people of different countries is due to 
a difference in their financial systems. 

Most of the commercially important countries have 
adopted the gold standard so there is no difference in 
that respect. We must go beyond that point to find the 
real cause of their difference in efficiency. We must 
look into the conditions relating to the real medium of 
exchange, which is, in all commercially important coun- 
tries, just as in this country, some form of bank credit. 
Consequently the variations we seek must be found in 
a difference in banking methods. 

In this investigation, the first thing to be noticed is 
the fact that practically all European countries have 
long since adopted the central bank idea, which the 



268 THE STRANGLE HOLD 

United States finally arrived at in a roundabout way 
through the adoption of the Federal Reserve Act. 

The Bank of England, to name the most familiar 
bank of Europe, consists of a central bank with nine 
branches. It is a private corporation, managed by a 
board of directors, chosen by the stockholders, with a 
banking department and a note issue department, con- 
ducted separately. This Bank acts as reserve depository 
for practically all the banks of the United Kingdom, 
and has the exclusive right of note issue. This note 
issue is limited and is based on government securities 
and gold. The people are served generally by means 
of a number of lesser banks, privately owned and man- 
aged. 

In this system there are two defects, the first being 
private management which precludes one hundred per- 
cent confidence and thus one hundred percent safety, 
and also precludes equal service to all members of the 
community. Such arbitrary power can not possibly be 
used with justice to all. 

The second flaw is that in this system the volume of 
the medium of exchange is determined not by the de- 
mands of business, as it should be, but by the amount 
of government obligations and the value of the gold 
held by the bank. 

The system is non elastic because of the fact that the 
only considerations for note issue are government obli- 
gation and gold. Neither of these elements are respons- 
ive to commercial activity or to the growth of business 
due to increase of population. 

The English system, then, falls very short of the 



NATIONAL EFFICIENCY 269 

mark of one hundred percent safety and one hundred 
percent elasticity. It is evident that no privately-con- 
trolled institution, operated for private gain, can hold 
one hundred percent confidence of the people, and the 
safety of any credit system is in direct proportion to 
public confidence. 

As the amount of the note issue depends upon the 
government obligations and gold held, and as the volume 
of credit depends upon the amount of the notes put into 
circulation, it is evident that the system has a very low 
degree of elasticity. Its basis of note issue is in no way 
responsive to the fluctuating demands of business. Pri- 
vate control also detracts from elasticity, because it 
serves the interests in control and fails to serve the 
whole community impartially. 

The Bank of France is a private institution with 
numerous branches. It is managed by a board of 
directors representing the stockholders. However, the 
government has a semblance of control through the gov- 
ernor and two deputy governors, appointed by the head 
of the state from among the stockholders. The bank 
has the exclusive right of note issue, the amount of which 
is limited by legislation. This amount is varied from 
time to time in anticipation of commercial needs. The 
note issue is based on the bank's assets. 

While this system has passed beyond the folly of a 
gold reserve the fault in the system is still two-fold: in 
that private interests are in control, which detracts from 
safety and also from elasticity as in the English system. 

Secondly, the note circulation is fixed by the legisla- 
ture — a non commercial agency which prevents the vol* 



270 THE STRANGLE HOLD 

ume of the medium of exchange from being fixed by the 
demands of business as it should be. 

The Reichsbank, in the days of the German Empire, 
was a private institution controlled by a president and 
board of directors who were appointed for life by the 
head of the state and who were not permitted to hold 
stock in the bank. They were, therefore, government 
officials and not private employees. The bank had the 
right to issue a fixed amount of uncovered notes and a 
practically unlimited amount of secured notes, two-thirds 
of which were based on commercial paper and the other 
third on "cash" not necessarily gold. 

This proposition of basing the note issue on the bank's 
assets, that is to say, mortgages, notes, acceptances, etc., 
was, no doubt, due to the fact that Germany could not 
procure gold as England could, for she had little foreign 
commerce at the time the Reichsbank was established, 
1875, and no possessions where gold was produced. 
Consequently she happened to adopt a financial system 
which did not have gold as a basis of note issue. 

This system, when put into effect, increased the elas- 
ticity of the medium of exchange for it was limited only 
by the confidence that the people had in the power that 
controlled the bank. 

The good results were produced because the system 
gave a broader basis to the country's credit. Practically 
the only check on note issue was a tax imposed on the 
surplus when the reserve fell below thirty-three and 
one-third percent of the secured note issue. 

Here then is quite a departure from the banking 
methods of other countries. This system was the only 



NATIONAL EFFICIENCY 271 

financial system from which private control had been 
partially eliminated, and the only one which made com- 
mercial activity its limit of credit. 

This difference of government control instead of pri- 
vate control, and this note issue based on commercial 
paper, the volume of which depended on business activ- 
ity, were the points of excellence in the system which 
made it superior to others. In this superiority in her 
exchange system we find the real source of the much 
vaunted German efficiency and achievement. However, 
while this system fitted an imperial form of government 
it could not serve a democracy because the idea of pub- 
lic control in the case of Germany was due to the auto- 
cratic idea of making all interests subservient to the 
state. In a democracy, the United States for instance, 
public confidence could not be gained by such an ar- 
rangement. Confidence in banks to be secure here must 
rest on exact knowledge. The people must know of their 
own knowledge that bank loans are on good security. 

But, the two provisions, of partial public control and 
a commercial basis for credits, supplied the necessary 
elements of safety and elasticity to Germany's medium 
of exchange in a greater degree than they were supplied 
to the medium of any other country, and, therefore, its 
efficiency was proportionately greater and was reflected 
in Germany's commercial achievement. 

The commercial advancement here mentioned is in 
direct contrast with the commercial achievement of one 
of the largest nations of the world — China. 

An old Chinese custom obliged every honorable China- 
man, as well as his eldest son, to commit suicide if, on 



272 THE STRANGLE HOLD 

the coming of the Chinese New Year, he found himself 
unable to settle his outstanding debts and start the new 
year with a clean sheet. If he lacked the courage to 
impose death on himself and his unoffending son, he 
was sent to prison or perhaps to the headsman, and all 
his relatives to the forty-second degree "lost their face" 
until his debts were paid. 

This system may have enforced honesty. It has often 
been referred to by American business men unable to 
collect bad debts. Economically, however, it was a most 
effective way of squeezing out of a people the last drop 
of initiative and enterprise. Each man played crabbedly 
and timidly and as a result, the people lived as miserably 
as rats in a country of good natural resources. 

These natural resources have not been developed be- 
cause China never has adopted a medium of exchange 
which would gain and hold the confidence of her people 
and that was elastic enough to permit her man power 
to be employed. Chinese exchange is carried on prin- 
cipally by the use of metal as a medium of exchange. 
This rigid and narrow exchange medium puts China into 
a financial strait-jacket. Imagine an American busi- 
ness man settling an account with a few bars of silver 
or a wheelbarrow filled with "cash," as the cheap brass 
coins, perforated and strung on strings are called. 

China's lack of enterprise and progress is due to a 
financial system so cramped that it does not permit her 
man power to be employed sufficiently to supply the 
needs of the nation. 

We have noted the financial systems of England, 
France, Germany and China and the different effects 



NATIONAL EFFICIENCY 273 

which the different systems have had on the national 
efficiency of these countries. 

History, instead of noting commercial advancement 
and its causes, consists of a chronicle of wars and 
dynastic and political changes with comemrcial and in- 
dustrial development as a side light. 

Could the history of the world be written in the 
light of real human achievement and well-being it would 
be found that advancement in civilization is due to im- 
provement in industrial and commercial methods. 

Industry and commerce are entirely dependent upon 
labor, mental and physical, and since labor is not a 
natural instinct of man, but must be induced by the 
hope of reward, it, therefore follows, that all advance- 
ment in civilization is the result of improvement in the 
means of producing and rewarding labor. That is to 
say, it is dependent upon the development of a more 
efficient medium of exchange. / 

Civilization is the result of exchange, therefore, social 
betterment is due to improved methods or means of ex- 
change. 

It follows then, that since the medium of exchange is 
the ladder by means of which humanity has climbed 
from barbarism to our present state of social develop- 
ment that further advancement is dependent on still 
greater improvement in this medium. 

By taking note of known facts and by logical conclu- 
sions we have seen the value of safety and elasticity in a 
medium of exchange and found that the principle which 
produces these essentials is public control. The control 
of the medium of exchange must be expressed through a 



274 THE STRANGLE HOLD 

system by which the volume of the medium is regulated 
by the requirements of business — the very principles 
advocated in these pages. 

Public control can be secured in a perfectly democratic 
manner without any radical change. It implies no ma- 
terial alteration in our present banking and financial 
system. All that it really needs is the modification of 
the present system so that its control shall be in accord- 
ance with the principles we have demonstrated to be 
correct. 

We need only to place the granting of loans on their 
intrinsic merits, displacing the private judgment of the 
banker with the exact information of the various markets, 
and of the assessor under a reformed plan of assess- 
ment. The right of appeal from the board of review 
or equalization, and a final settlement by a jury where 
personal interest dictates the verdict will absolutely 
guarantee correct valuation. 

Public control of the greatest of our public utilities 
— our medium of exchange — would thus increase our 
present meager portion of individual and collective effi- 
ciency to a full one hundred per cent. Not only would 
we benefit personally and nationally but the cause of 
civilization and the welfare of all humanity would be 
advanced. 



CHAPTER XVIII 
THE CONCLUSION 

SOME of those who have read these pages may feel 
that the change proposed will be an infringement 
upon the rights of the banker. They may still think 
that it is the banker's money that is being loaned and, 
consequently, they may feel that the banker should have 
no restrictions placed upon his loans. If it were his 
money perhaps he should be allowed to loan to whom 
he wishes, when and where and in any manner he pleases, 
but this is not the case. 

To answer this possible objection we need only re- 
mind the reader that the banker does not lend money. 
He lends bank credit which has displaced money and is, 
therefore, a public utility. Its value rests entirely on 
the people's laws and the people's confidence and not 
at all on the banker's money or his personality. It will 
be seen, therefore, that the proposed regulation is not 
only justified but necessary. And if any doubt still 
remains, it should be swept away by a consideration of 
the enormous public advantages that would be gained. 
For when we reflect that the loans made by the banker 
constitute our medium of exchange, the tool with which 
we produce and carry on trade, the means by which 
labor is induced and rewarded, the element which every 
person must use in order to enjoy those blessings of life, 
liberty, and the pursuit of happiness guaranteed by our 

275 



276 THE STRANGLE HOLD 

Declaration of Independence, the situation is put in a 
very different light. 

A person in a civilized community cannot apply his 
energies to the development of the resources of the 
country without the use of the medium of exchange. It 
follows, therefore, that control o^ this utility controls 
the energy, the activity and, in fact, the whole life of 
the community. The effect of bank control of this great 
public utility can be graphically demonstrated as fol- 
lows: 

In the following diagram let E. represent the ener- 
gies of all the people and R. the resources of the coun- 
try, such as all the land, timber, waterpower, mineral 
wealth, etc. 

In the United States there is about one bank to every 
4,000 inhabitants so the bank window in the diagram 
should be about one four thousandth part of the size of 
the energy of the people. 

With the bank in control of practically all of the 
medium of exchange, that is, all of it except the small 
change the merchant has in his till or the little we carry 
for minor necessities; it is evident that in order to use 
this public utility to any practical extent, the banker 
must be consulted. Therefore, the energies of the com- 
munity cannot be directly applied to the resources of 
the country but must pass through the bank window as 
shown in diagram No. 1. Those who are fortunate 
enough to secure the use of the medium of exchange to 
an extent great enough so they can apply their energies 
will employ some of those who are not so fortunate, and, 
therefore, these lines, after passing through the bank 



THE CONCLUSION 



277 



window, should diverge somewhat, in practice; but, if 
we consider only those who are thus permitted a degree 
of freedom of action, these lines should not diverge, 
but will be as in Diagram No. 1. We see then, that 
our present efficiency, with liberty, is compressed to a 
small portion of that which the whole energy of the 
people could produce. It is limited by the energy per- 
mitted, to get through the bank window. 



DIAGRAM No. 1 


R 


Bank window under 
private control. 


8ES0U&CES OF 
TOE COUNTRV 


I* 


Pasta Efficiency 







ENERGY 

OF ALL 
THE PEOPLE 



This diagram shows the result of private control of the 
greatest public utility which makes the use of the medium 
of exchange A PRIVILEGE. 

Substituting public control for private control of our 
medium of exchange by displacing the private bank 
appraiser by a public appraisement and the "finance 
committee" of the directors by a public functionary 
would make the medium of exchange usable on the initi- 
ative of each individual and on the same terms by all. 
The bank window would be greatly enlarged and the 
energies of the people could then be applied directly 
to the resources of the country. This change would 
cause a great increase of efficiency as shown in 



278 



THE STRANGLE HOLD 



DIAGRAM No. 2 




8 




f?£$OURCE$ OF 
THE COUNTRY 



PRESENT CFFICKNCY 






This diagram shows the effect of public control of 
the greatest of public utilities which makes the use of 
the medium of exchange A RIGHT. 

By public control we would not only increase our 
personal and national efficiency from the present meager 
portion to 100%, but our liberty and democracy would 
be increased in the same ratio. 

Social development decreed that something was neces- 
sary as a measure and as a means of rewarding effort. 
The first law of nature, self preservation, demanded and 
always will demand that the fruits of effort shall be 
enjoyed by the person making the effort to the exclu- 
sion of all others. 

These considerations make two requisites necessary in 
whatever may be used as a medium of exchange. 

First, the reward must be automatically bestowed 
because, if it is under the control of any person or 
group, the judgment and desire of that person or group 
will dominate the community and will result in in- 
justice and also in the supression of individual effort 
and individual development. Even though the utmost 
honesty and unselfishness is used in exercising the con- 



THE CONCLUSION 279 

trol no other result is possible. The limitations of 
human nature set by the first law, self preservation, must 
give this result. 

Second, whatever is used as such medium must have 
the confidence of the community in order to have value 
and its value must remain constant. Unless the value of 
the reward of effort remains stable a feeling of unrest 
and uncertainty will menace the community. The only 
value the medium of exchange has is its exchange value 
and if this value fluctuates then the medium is valuable 
only within the limits of the fluctuation. That is, the 
less it fluctuates the greater its value. 

If the dollar received today buys but fifty cents worth 
a month or a year from today the reward of effort will 
be cut in half. Such an occurrence will most certainly 
create dissatisfaction and uncertainty. Business calcu- 
lations will be upset, unforeseen losses will be suffered 
and a constant feeling of fear, unrest and worry will 
menace the community. 

The defects in our system which cause these unfavor- 
able phenomena and prevent us from enjoying personal 
liberty, security and confidence have been thoroughly 
explained and the remedy necessary to overcome them 
has been clearly set forth. Its adoption will give us a 
medium of exchange and reward of effort as perfect as 
any human institution can be made. 

It has been thoroughly demonstrated that personal 
and national efficiency and well-being depend on the per- 
fection of this medium, so with its improvement our 
personal and collective prosperity, comfort and happi- 
ness will improve in like degree. 



280 THE STRANGLE HOLD 

No country in its medium of exchange has ever at- 
tained perfection in these two desiderata of elasticity 
and safety but some have approached it in a greater or 
less degree. It has been shown that the efficiency, 
progress and well-being of the various countries and 
peoples have always been in direct proportion to the 
nearness of this approach. 

There still remains, however, one point which should, 
in justice to the banker, be clearly brought out. From 
what has been said it may be thought that the bankers 
are in some degree personally responsible for our 
troubles, since they are in control of the medium of 
exchange. This, however, is not so. 

If the impression exists that any banker is in any way 
responsible for the defects in our present financial sys- 
tem or that he can be held accountable for our present 
or past economic ills such a notion should be dismissed. 

The banker is a victim of the system along with the 
rest of the community. 

The use of bank credit as a medium of exchange was 
developed because industrial growth made a greater de- 
mand for an exchange medium than the money metals 
could supply, so to continue to use metal alone would 
have held progress in a vise and checked development 
as it does in the case of China. 

The gold standard, or the use of gold as a basis for 
credit has become increasingly more difficult as business 
and credit developed but it has been the only method 
so far known of holding public confidence in bank credit. 
It would never have been possible to persuade the people 
to deposit their funds in a bank had they not supposed 



THE CONCLUSION 281 

that the banker kept the money for them and would 
hand it back any time they wanted it. Since bank de- 
posits make it possible to substitute bank credit for 
money a complicated system of reserve requirements 
developed for the purpose of continuing this illusion. 
An expose of the true state of affairs, even a few years 
ago, might have precipitated a panic, for our system at 
that time could not have withstood the shock of the 
truth. Now, however, with all financial reform striving 
to arrive at the point which this book shows how to reach 
by taking another short step in the same direction con- 
fidence will be increased instead of diminished by discus- 
sion and understanding. One conclusion is certain, 
since our exchange system is the result of evolution, no 
banker or anyone else, at the present time, is to be 
censured for its shortcomings. 

The test of the banker's good faith and understanding 
will come only when he realizes that fiction and foibles 
have outlived their day of usefulness and that a logical 
and better way of securing public confidence is neces- 
sary. When the slight change herein suggested is fully 
understood, it will be realized that public control fur- 
nishes a practical method of putting bank credit on a 
safe and just basis. The change for the better, from 
every standpoint, is so obvious that even the most con- 
servative banker will hardly attempt to argue that it is 
not an improvement on the present system. When the 
suggested change is understood, the practical benefits 
which will accrue, and the justice of the arrangement is 
so apparent, honest objection seems impossible. And, 
because it is all so American those who still advocate 



282 THE STRANGLE HOLD 

clinging to the status quo can do so only for the purpose 
of perpetuating their present power and privilege. Such 
action would certainly be contrary to good citizenship. 

In the proposed remedy there is not the least sug- 
gestion of a change in our money or methods of using 
it. There is no suggestion of change in business 
practice or methods or in the status of the bank. The 
only suggestion is to overcome the bankers' authority 
to dictate the use of the medium of exchange by the 
same means and for the same reason that we overcame 
the private control of the medium of transportation — 
the railroads. It suggests applying to the medium of 
exchange the same principle of public control which was 
applied to the medium of transportation through the 
Interstate Commerce Commission. 

The proposed change does not even suggest that the 
banker give up his power without compensation, for it 
is proposed to give the banks SAFETY in exchange 
for POWER. 

By putting bank credit under public control in the 
manner suggested every loan any bank could legally 
make would be perfectly safe. This end must be ac- 
complished or our proposed change fails in its primary 
object which is to secure to bank credit 100% public 
confidence. 

It has been seen that the suggested plan accomplishes 
this purpose because it prohibits banks from lending 
more than a safe amount on any security, and permits 
loans only on securities approved by the people them- 
selves. With such a system in operation no bank could 
possibly make a bad loan. 



THE CONCLUSION 283 

Consequently, a great weight of responsibility would 
be lifted from the banker's shoulders, a relief which 
he alone can appreciate. 

Under our present system the banker must be always 
on guard not only against schemers but he is constantly 
being asked to make loans to social or business associ- 
ates on security or under conditions which he does not 
fully approve. Sentiment and friendship, however, 
prompt him to make many such loans. This yielding to 
a common human weakness causes worry and often 
brings unfavorable criticism and loss, so the banker is 
constantly torn between sentiment and judgment. 

The proposed change would protect all bankers from 
both their friends and their enemies. It would even 
do away with the necessity for good judgment on their 
part for it would, by confining all bank loans to ap- 
proved security, do away with the chance for loss. 

No reason, other than a desire to retain power, is 
apparent why such a system should not be as welcome 
to the bankers as to the rest of the community. 

With the assurance of safety which public control 
would give, the people would have 100% confidence in 
the bank. In that case there would never be a demand 
made on any bank for a money payment, so the neces- 
sity for a reserve, the banker's greatest worry, would 
be removed. 

To be sure money would be used just as it is used 
now for small transactions and in all respects it would 
be the same money used today. The only difference 
would be that instead of having a hazy notion that money 
called for gold it would be known that it called for 



284 THE STRANGLE HOLD 

credit. It would also be understood that the federal 
reserve note was simply a different form of bank credit 
and the delusipn that it represents gold would no longer 
exist. 

If the banker did not happen to have on hand all the 
notes desired by a customer, the Federal Reserve Bank 
would accept any piece of paper in any bank for its 
discount value in those notes. The people knowing that 
money could always be had would never call for it, or 
use it, except as a means for carrying on small transac- 
tions where it would be inconvenient to draw a check. 

This change would make all good securities bankable 
and make all bank credit good money. 

It has been shown that the only reason why a good 
security is not at present always bankable is either be- 
cause the banker does not want to lend to the person 
who offers it or because it is not a liquid security. The 
reason why securities must be liquid now is because the 
people, lacking confidence in the bank, may wish to 
draw out their deposits and, consequently, securities 
must be such as can be quickly turned into money. 

Public control would remove both of these reasons so 
that every good security would be a bankable security. 
The term "liquid" security would soon be obsolete. All 
security would be equally liquid and equally bankable. 

With this change every branch of industry would have 
the same access to the use of the medium of exchange. 

The automobile dealer would no longer be excluded 
because a few persons happened to decide that he was 
selling a luxury which ordinary people had no right to 
enjoy. 



THE CONCLUSION 285 

The farmer would no longer be a financial outcast 
because his occupation does not permit him to use thirty, 
sixty and ninety day money. The bank would no longer 
have a time lock on it against the farmer. 

The exporter could extend credit to any length of 
time necessary to carry his trade and he would not be 
under the necessity of robbing his customers through 
the fall in the value of foreign exchange or of driving 
business away because of lack of credit facility. 

Credit could be extended to any length as far as both 
time and amount are concerned. The only requisite 
would be sufficient security. As long as the security 
was good and the interest paid there would be no limit 
of time nor amount and no other consideration. There 
would be no control except the demands of business. 

Every man would be enabled to stand on his own feet, 
use his own judgment and conduct his own business as 
he saw fit, without fear or favor. All legitimate enter- 
prises would be readily financed because there would be 
no limit to the medium of exchange. Prosperity would 
not kill prosperity by causing a blockade of credits 
against the reserve requirement. There would be no 
freezing point for credit, so the wheels of industry would 
not be stopped by "Frozen Credits." Business would 
be always on the increase due to a constant demand 
caused by a continued rise in the living standard. There 
could be no "Buyers' strike" for desire is never satis- 
fied so long as the means of turning desire into demand 
can be had. We would then have "normalcy" and our 
normal conditions would be one of peace and happiness. 
Science would advance, the arts be encouraged and 



286 THE STRANGLE HOLD 

through a general, continued prosperity civilization 
would be extended to the utmost. 

The flaw in our system which prevents the accomplish- 
ment of these desired ends has heretofore been hidden by 
the bad symptoms which it produced. 

For instance, the most recent bugaboo, the H. C. L. 
has been shown to be due to a fluctuation in the value 
of the dollar. It is this fluctuation which causes the 
disparity between income and the size of the grocery 
bill, butcher bill, the cost of clothing and the rent. 

If the fluctuation in the value of the dollar were 
stopped, industrial turmoil would stop, and the con- 
tinued friction between capital and labor would be re- 
moved. The bridging of this chasm would surely be a 
great relief to industry and to society generally. 

The value of all property and the price of commodities 
would be stable, varying only with the demand for and 
the supply of various properties and goods. Business 
could then be conducted with much more certainty and 
success would depend more on efficiency than on chance 
and not at all on the banker's favor. 

A farmer would not plant and harvest a crop with 
dollars worth only fifty cents and be compelled to sell 
his crop for dollars worth one hundred cents due to the 
fact that during the summer the banks had shut down on 
credit. That is, he would not have to pay two dollars 
for everything he bought in the spring and receive but 
one dollar when he sold in the fall. He would then sell 
his crop for the same sized dollars that he spent for 
plowing, planting and harvesting. The changing value 
of the dollar between the spring and the fall of 1920 



THE CONCLUSION 287 

caused the price of farm products to shrink from one- 
third to one-half and even more. 

If a thief stole from the farmer one-third to one-half 
of his crop the whole country side would be out to run 
him to earth and jail him. The object for so doing would 
be twofold. First, to keep the thief from robbing others 
and second, to correct the error of his ways. Since the 
banking interests did that very thing to the agricultural 
interests, when they "deflated" the medium of exchange 
between planting time and marketing time, would it not 
be wise to stop them from further marauding by correct- 
ing their ways of doing business ? 

Even the most complacent "stand patter" will hardly 
have the nerve to suggest "over production" as a reason 
for the recent fall in prices when half the world is in 
want. The fall in prices for most agricultural products 
during the summer and autumn of 1920 was due entirely 
to the weakness in our financial system. All such un- 
certainty, worry and loss could be done away with by 
putting into effect the remedy here given. Such an 
accomplishment is surely sufficient to fully justify the 
change even if there were no other advantages to be 
gained. However, let us examine a problem which 
caused much comment before the war and which is 
still the object of legislation and of court action. We 
refer to the trusts. 

There is the "Beef Trust" and the "Coal Trust" and 
the "Steel Trust" and numerous other trusts. For the 
last quarter of a century the word trust with a more or 
less indefinite meaning has been made the scapegoat for 
all our economic ills. They are supposed to be both 



288 THE STRANGLE HOLD 

father and mother to all the imaginary evils, such as the 
"H. C. L." and others. 

When prices go up the ire of consumers is directed 
against "the trusts" and when prices go down the pro- 
ducers' wrath is directed against the same "trusts." This 
railing against "trusts* has gone on until now the word 
has come to be used as an epithet to describe, or rather 
to locate in a general way, what the user considers to 
be the cause of unsatisfactory economic conditions which 
he does not clearly understand. 

Originally the word trust meant a business organiza- 
tion or an aggregation of business interests associated or 
consolidated for business purposes. 

So described, the trust is, not only an outgrowth of 
human progress but it is an expression of advancing 
civilization because it co-ordinates effort and reduces 
waste. With this object in view it is the hope of the 
future for it will increase efficiency and thus advance 
civilization. 

The evils charged to the trusts and the oppression 
which they no doubt have exerted is not the fault of the 
trust, but arises from the fact that those who control 
them also control the medium of exchange and by exert- 
ing their power over credit they naturally chill and 
check all enterprise not tributary to the trusts they con- 
trol. In this way selfish interests curtail the produc- 
ing power of the nation and this gives to the trusts a 
control over production and prices which they, by them- 
selves, never could expect nor maintain. 

No man, nor set of men, could monopolize the sources 
of production, that is, the raw material and at the same 



THE CONCLUSION 289 

time command the skill and labor necessary for efficient 
production, except through the control of a great public 
utility such as the railroad or the medium of exchange. 
We recognized this power in the case of the railroads 
and we thought we had overcome the difficulty when we 
put them under public control but it is quite evident now 
that we did not reach the real cause of the trouble. 

It is readily seen that the trust, in itself, has no ad- 
vantage in commercial competition unless it improves on 
methods of production or marketing. Its apparent 
power is wholly extrinsic, and is due entirely to money 
control not trust control. 

This power of money is the prerogative of but one 
trust — the "Money Trust," which we have seen is neither 
more nor less than our banking system. The fact that 
those who control the trusts also control the banking sys- 
tem is so notorious that we need scarcely call attention 
to it. 

When through public control we give to all, an equal 
right to use the medium of exchange the "Money Trust" 
will loose its power and all trusts will then appear in 
their true light. They will appear no longer as bogies 
or scapegoats but merely as combinations of interests for 
improvement in production and the advancement of trade. 
Advantage can then be gained only by reducing cost and 
when a saving is made in production or distribution the 
whole community profits because it is the object of civil- 
ization to supply man's wants with the least effort. If 
the trust does not succeed in reducing cost the combina- 
tion will have failed in its object and will disappear. 

There is another important improvement that will fol- 



290 THE STRANGLE HOLD 

low public control which has not been noted and which 
will not be understood without considerable thought. It 
is not quite so apparent as other benefits but it will never- 
theless be most welcome. This is the betterment which 
would come about by changing the motive which now 
prompts men to accumulate great wealth. 

Starting out, of course, men strive to obtain the nec- 
essaries of life, then the comforts and then the luxuries. 
But when all these are assured by the accumulation of a 
great fortune why do men still strive for gain ? 

There can be but one reason, other than force of 
habit, and that is, men love power and the control of 
money under our present system gives it to them. 

After accumulating a fortune, which assures to the 
owner and his family all the comforts and luxuries of life, 
a man will continue working and accumulating because 
of an instinctive love to dominate his fellow men. 

Under our present political form of government it is 
only through the control of money that man can gratify 
this desire. 

To limit by law the amount any man may accumulate 
or own, would result only in harm for it would put a limit 
to enterprise and would unnecessarily interfere with 
personal liberty, therefore, such action should be avoided. 

Public control of the medium of exchange accom- 
plishes the same object without destroying initiative, for 
when all are permitted to use the medium of exchange 
on the same terms the power of money will be destroyed. 
By divesting money of its power incentive to accumulate 
beyond the point where comforts and luxuries are assured 
would be removed. 



THE CONCLUSION 291 

Moneys the medium of exchange, holds its power only 
because private persons control the money function 
through controlling bank credit and, therefore, can deny 
its use. 

This money power exerts control in exactly the same 
way as the railroads formerly did or as any other pub- 
lic utility would in proportion to its importance. Any 
facility which must be used by all the members of the 
community would give to those who could control 
such a facility power over the community. Bank credit is 
such a facility, for it is our medium for carrying on 
trade and all must use it to make a living, so its control 
gives power. But, when the private control of that me- 
dium is overcome by permitting all to use it on the same 
terms, the ' 'power of money" will be destroyed. 

The homage which is paid to wealth today comes 
from a mistaken idea that the power of money is due to 
wealth. Therefore, a natural thirst for power and pres- 
tige induces men to accumulate wealth beyond their needs 
only for the purpose of gratifying a common human 
weakness. 

In this connection, the terms wealth and money must 
not be confounded nor misunderstood. Let us define 
wealth as any piece of property of value such as a 
building, a piece of land or a quantity of merchandise. 
It is quite evident that nothing of that kind can exert 
power because none of us are compelled to use any par- 
ticular building, piece of land or certain lot of merchan- 
dise. If we cannot secure what we want at our price we 
can do without it, we can use something else. 

But, if money is defined as the medium of exchange, 



292 THE STRANGLE HOLD 

it is a very different story for we must all use that. 

We cannot produce the things necessary for life nor 
carry on business without using the medium of ex- 
change. In fact its use is much more necessary in the 
every day affairs of the community than the railroad or 
any other facility. No exchange of goods or of services 
can take place without it, so to keep it from controlling 
us we must make its use a right. 

As long as the use of it is a privilege which can be 
denied we give to those who control it a most complete 
power over us. Since the medium of exchange is almost 
as essential to industry as air and water are to physical 
existence, the power which controls it has practically 
supreme control over the community. 

We see, therefore, that wealth has no power be- 
cause we are not compelled to use any certain piece of 
wealth, but the medium of exchange has because we 
are all compelled to use it. The power of money arises 
from the fact that its use, while necessary, can be denied. 
It is plain, therefore, that if our exchange system were 
so arranged that the use of the medium could not be 
denied, that is, so that all could use it on the same terms, 
the power and prestige of money would be overcome. 

Up to the point of supplying our wants, efforts to 
acquire wealth are spurred by a desire to better our con- 
dition, or in other words, to raise our living standard. 
This ambition should be encouraged but beyond the 
point of satisfaction of desire it is merely the love of 
money for the power it gives that induces the effort to 
accumulate. 

It is evident then that if power is taken from money, 



THE CONCLUSION 293 

avarice, which is the love of money for money's sake, will 
be destroyed. With its power gone neither money nor 
wealth from which its power is supposed to spring would 
command homage nor cause envy and class hatred. 

Without power, money would be merely a commercial 
tool and there would be no object in piling it up any 
more than there would be in gathering up a hundred 
hammers when one hammer would do the work. 

Such a condition would bring about many improve- 
ments in our social as well as in our industrial life. The 
homage now paid to wealth would disappear. Property 
would be accumulated only to satisfy an ambition to live 
well. When a sufficient income was secured to assure 
the satisfaction of desLe, the accumulation would cease 
for there would be no object gained or purpose served 
m accumulating more. 

Industrially, public control would open the door of the 
bank to all branches of industry and remove the present 
restraint on production and trade. Efficiency and square 
dealing would replace favoritism and chance in business. 

Aside from the industrial and social advantages to be 
gained by public control of bank credit there is yet an- 
other advantage not to be lightly considered. That is, the 
improvement in moral standards which would follow the 
change of the basis for bank credit from the false prom- 
ise of gold redemption to one of real security and truth. 

That our present system of credit rests on a false 
promise, that of gold redemption, covered by a smoke 
screen of reserve deception, cannot be denied. Such a 
condition certainly is not conducive to good faith and 
integrity in any of our dealings. But, when the founda- 



294 THE STRANGLE HOLD 

tion of our greatest public utility is changed to one of 
truth and honesty as suggested, then honor instead of 
cupidity will be at a premium. 

When the bank's power is destroyed, as the railroad's 
power was, push will displace pull as the requisite for 
business success and the man instead of the courtier will 
win. 

When the suggested change is adopted the financial 
system will enable every man to stand on his own feet 
and will grant him success according to his own efforts. 

The citation of existing evils, which would disappear 
and of improvements in our industrial, social and moral 
status which would follow from the proposed change in 
the financial system, could be carried to indefinite lengths. 
However, enough has been said to thoroughly establish 
the fact that all members of the community would be 
benefited and no one would be injured by the change. 

In the proposed remedy there is no suggestion which 
is not clearly and directly in line with American prin- 
ciples, ideals and experience, and also in direct line with 
financial evolution and development. It is but one more 
step in advance along the same highway of progress 
which civilization has followed from the beginning. 

However, in order to forestall the usual cry of "rad- 
ical" the fact should be clearly noted that the only 
change suggested herein is to extend our well estab- 
lished principles of public control of public utilities to 
include the medium of exchange. Experience has taught 
the American people that public control of public util- 
ities is necessary in order to put into practice the prin- 
ciples of liberty and equality on which our nation was 



THE CONCLUSION 295 

founded. Consequently, when it is definitely established 
that the medium of exchange is a public utility, one can- 
not oppose the suggestion of public control for it and 
still be considered a good citizen. 

On the contrary, it becomes the patriotic duty of every 
good American to spare no effort to secure this change 
for it is necessary in order to realize the principles of 
liberty and equality which the American people have 
proclaimed to the world as being the foundation of their 
government. 



APPENDIX 

Appended are verbatim copies of official documents 
furnished by the Comptroller of the Currency. They 
speak for themselves and supplement and support the 
text. The facts set forth in these documents are quite 
startling to those unacquainted with "Wall Street" and 
as they are based on the statements of the banks them- 
selves they should be carefully read. 



NOTE 

The side notes are intended to call attention to the 
points where these official documents supplement the 
statements made in this book. After reading the ap- 
pendix a review of the chapter on the "Federal Reserve" 
and those following it will convince any reasonable per- 
son that a revision of our exchange system is necessary 
and a review of Chapters VII and VIII will show that 
the remedy suggested here is practical and complete. 



296 



FOR THE PRESS 

OFFICE OF COMPTROLLER OF CURRENCY 

The Comptroller of the Currency said today: 

NEW YORK CALL MONEY RATES HIGHEST IN 

THE WORLD 

Unjustifiable Interest Exacted on Demand Loans Ag- 
gregating Billions an Active Contributing Cause of 
Exorbitant Rates for New Capital Charged Cities, 
Railroads, Industrial and Other Public and Private 
Enterprises and for the Huge Shrinkage During the 
Past Year in All Security Values. 



"Renewal" Rates Fixed Daily by Small "Coterie" of 
Stock Exchange Brokers Govern Interest Charged on 
Brokers Loans in Nearly All New York Banks. 



In a statement given to the press on July 31, 1920, 
I expressed the opinion that there was no justification 
for the excessive and burdensome interest rates "running 
up to ten, twelve and fifteen per cent and higher, which 
had been exacted by some of the banks in New York 
City, the principal financial center of our country." 

It is no part of my business to discuss now the moral- 
ity or the ethics of these transactions. It is my imper- 
ative duty to take close cognizance of them so far as 
they may have effect on the general banking and com- 

297 



298 THE STRANGLE HOLD 

mercial interest of the country. I realize clearly the in- 
estimable and indisputable value to our own country and 
wall the world of the great money center popularly known as 
street "Wall Street ;" and have no purpose or wish to stir prej- 
udice against it, or to do or say anything to impair its 
usefulness or to injure any institution or individual con- 
nected with its activities. I do intend, strictly in the line 
of official duty, to put before the public and the news- 
papers facts of which both are uninformed and to point 
out evils already existing and dangers threatened be- 
cause of those facts. 

In the statement of July S 1st, I called attention to 
the fact that New York was the only city of conse- 
quence in the world where such interest rates existed or 
are tolerated and I expressed the belief that the exac- 
tion of these rates, the publicity given them, had in- 
creased the uneasiness in financial circles and had been 
an active contributing factor rather than a consequence, 
evils or in the unsettling of security values, and that they had 
usury operated to force railroads and industrial corporations 
to pay burdensome and costly rates in providing fresh 
capital for the industries and business of the country. 
I also pointed out that the banks which had been charg- 
ing their customers these excessive rates 

"at times as high as fifteen per cent or more have 
themselves at the same time been liberally accommo- 
dated with millions of dollars by the Federal Reserve 
Banks at average rates of considerably less than six 
per cent." 

This press statement was vigorously attacked in the 
columns of the New York papers in interviews with vari- 



APPENDIX 299 

ous anonymous bankers and financiers who refused, how- 
ever, to permit their names to be used. One leading jour- 
nal, for example, quoted bankers as saying: 

"It is unfair to attempt to defame the whole New 
York banking community just because of one or two 
possible insignificant instances of abuse." 

Another leading New York paper declared that the 
high rates quoted on the Stock Exchange applied only to 

"a small amount of money relatively speaking." 

The investigation which I have made since my public 
statement on this subject completely confirms the views 
expressed and proves that they were, if anything, too 
conservative. 

In order that the public might be fully informed, and 
know the exact facts in regard to the money situation 
in New York, the national banks in New York City were 
requested by the Comptroller of the Currency, under date 
of August 5, 1920, to furnish, under oath, a report of banks 
the number and amount of all demand loans secured by convict 
bonds and stocks made monthly by them between Octo- THEM ~ 

SFLVFS 

ber 1, 1919, and July 31, 1920, upon which they had 
exacted interest in excess of six per cent per annum. The 
banks generally, including the largest bank in New York 
City, complied with the request, but three banks de- 
murred, claiming that it would be impracticable for them 
to furnish the data called for as to various loans made 
by them at excessive interest rates by months as re- 
quested. They were, thereupon, requested to furnish in- 
formation as to the loans made by them for about eight 
days in each month since October 1, 1919, these eight 
days including, generally, the high money periods in each 



300 THE STRANGLE HOLD 

month. It should be understood, therefore, that in the 
statement which follows, three of the larger banks have 
included only a portion, and not all, of their loans made 
at the high rates. 

The banks were requested, in submitting their state- 
ments, to count as a new loan each change in the in- 
terest rate on their existing call loans. If a loan, for 
example, should be made for $100,000 to a brokerage 
firm by a certain bank at 10%, and the rate changed 
five times in 30 days, this loan would be regarded as six 
loans with an aggregate of $600,000. Therefore, these 
demand loans embraced in this statement should be con- 
sidered as running from one day upwards. It should also 
be explained that, in the case of one of the three banks 
which reported its loans for only a portion of the period, 
call loans are included which were made by this one 
bank for outside banks as well as for itself. These out- 
side loans sometimes amounted to more and sometimes to 
less than the call loans made by the bank for its own 
account. 
30% The sworn reports to this office show that during the 
interest p er i a from October, 1919, to August 1, 1920, there 
were made by the national banks in New York City more 
than 4,000 loans, at rates of 15%, 20%, 25% and 30% 
per annum, and that the amount of these loans, including 
only a portion of those made during this period at the 
above rates in three of the largest banks, aggregated 
over Six Hundred Million Dollars ($600,000,000). 

The records also show that the total loans outstand- 
ing upon which interest at 15 to 30 per cent was being 
charged by a portion of these banks on 42 different 



APPENDIX 301 

days, for which reports were received from them, aggre- 
gated over $1,100,000,000. It will be remembered that 
in my statement of July 31, the banks were charged with 
making loans at "10%, 12% and 15%." The actual 
facts, therefore, in view of the loans made at 15%, 20% 
and 30% indicate that my statement was extremely con- 
servative. 

The records also show that the amount of loans made the 
during the same period at rates in excess of 10% and confession 
up to but not including 15% amounted to over $1,400,- 
000,000, there being over 11,000 of such loans. 

In addition to the above the aggregate of the loans 
upon which a portion of the banks reported that they 
were charging, on 81 different days, interest in excess 
of 10%, and up to but not including 15%, was about 
$900,000,000. The "brokers" or "Street" loans upon 
which the New York banks, during the period referred 
to, were charging MORE THAN eight per cent per 
annum and up to 10%, reach, in the aggregate, some 
billions of dollars additional in amount and tens of thou- 
sands in number. 

It should be understood that these loans (except in the 
case of one bank) represent the money loaned by the 
banks for their own account, and the figures do not in- 
clude the loans made for their correspondent banks. 

As a result of persistent inquiries among the banks, "call 
brokers and stock exchange authorities, this office is money 
now, for the first time, able to inform the public as to 
how the so-called "renewal" rate is made from day to 
day in the New York Call Money Market, and the extent 
to which this money rate is observed by the New York 



302 THE STRANGLE HOLD 

banks in making their charges on ordinary Wall Street 
or brokers' loans. 

Under the New York banking law, it is lawful for a 
lender to charge any rate of interest which may be agreed 
upon with the borrower on a demand loan for $5,000 or 
more secured by stocks, bonds or other securities. This 
provision of the New York Statute enables lenders to 
escape penalties for usury which exist in most of the 
other States. 
the "pump From information furnished this office, through differ- 
handle" ent sources, it appears that every business day a coterie 
of brokers, members of the New York Stock Exchange, 
get together for consultation on the floor of the Ex- 
change, or by telephone, and determine what, in its view, 
is the proper rate for the renewal of all street or brok- 
ers' call loans for that day. As soon as the rate is agreed 
upon the President of the Stock Exchange is notified, 
and the rate is posted on the floor of the Stock Exchange 
at, say, 11 o'clock. 
rate on This rate is then sent over the "ticker" to all the banks 
broker s j n New York City and these banks thereupon mark up 
or down, as the case may be, the rate of interest upon 
practically all their Wall Street or so-called brokers' 
loans. Some banks take the precaution to notify their cus- 
tomers by card, sent by mail or otherwise of the change 
in interest rate on their loans, while other banks do not. 
They claim that the posting of the renewal rate on the 
floor of the Stock Exchange serves automatically to raise 
or lower the rate of interest on this character of loans, 
held by all the New York banks, for themselves or their 
out of town correspondents, and their customers are 



LOANS 



APPENDIX 303 

charged the rate so posted, unless they make special 
arrangements with the bank to the contrary, or pay the 
loan. 

In the questionnaire sent by the Comptroller of the 
Currency to all the national banks under date of August 
5, 1920, each bank was asked the following question: 

"Has it been the practice of your bank, during the 
past six months, to mark up or down, from day to day, 
according to the fluctuations of the New York Call 
Money Market, the interest rates on demand or call 
loans, secured by bonds or stocks, made to borrowers 
who are not depositors in your bank V 

In reply to that question every National Bank in New banks 
York City with two or three exceptions answered "Yes," plead 
and two of these stated that they too, under certain con- guilty 
ditions also charged the "call money" rate. 

It is fair to say, however, that nearly all of these 
banks with a few prominent exceptions stated that it had 
not been customary with them, in making advances in 
rates, to increase the rates on demand or call loans made 
to their own regular customers who kept deposit accounts 
with their banks and that these regular customers were 
treated differently from the ordinary brokers or Wall 
Street borrowers. It is also worthy of note that demand 
loans, secured by stocks and bonds, made by banks to 
their own officers and to the officers of other banks are favor- 
also generally exempted from the high interest rates. itism 

It is also fair to state that the reports in this office 
show that despite the huge volume of loans made at fancy 
rates, less than one-half of the National Banks in New 
York City reported that the demand loans made for 



304 THE STRANGLE HOLD 

their own accounts at rates of 15% or more, aggregated 
for each bank over ten million dollars between October 
I, 1919, and July 31, 1920. 

In their reports to this office of September 8, 1920, 
the national banks of New York City reported that they 
were lending on demand, on bond and stock collateral 
over $348,000,000. 

The national banks in New York City also reported 
that on August 1, 1920, the amount of money which they 
were loaning on demand, on bond and stock collateral, in 
New York City for account of customers and corre- 
spondents was $524,000,000. 

It is fair to assume that the Trust Companies and 
State Banks in New York City were lending demand 
on stocks and bonds as much as the National Banks. 

The Stock Exchange authorities state that the post- 
ing of the "renewal" rate on the floor of the Stock Ex- 
change does not make it compulsory with the banks to 
charge such "renewal" rate. Attention, however, must 
they all ^ e ca ^ e( i to the fact that nearly every National Bank in 
do it New York City has admitted that when the rate is 
posted, the rates charged on "brokers" or "street" loans 
are changed to conform to the prevailing Call Money 
Rate and the only alternative for a borrower is to pay 
his loan or be charged the posted or current rate. As 
nearly every bank in New York charges the so-called 
"renewal" rate on what are known as Wall Street or 
the "brokers" loans, it would be vain, obviously, for bor- 
strangle rower to hope to obtain the money in New York at a 
hold i ower ra te by shifting his loan to some other bank. 

Despite the statement of the banks generally that the 



APPENDIX 305 

interest rates on brokers' loans are raised or lowered sim- 
ultaneously with the fluctuations in the New York Call 
Money Market, many instances of apparent discrimina- 
tion were developed which show wide differences in the discrim- 
rates charged on demand loans equally well secured. For INATION 
example, when the "renewal" rate for a certain day 
within the last twelve months was posted, on the Stock 
Exchange at 16% the report of one particular New 
York bank showed that on that date this bank was 
charging on loans for itself and correspondents: 

7% on $4,900,00 

8%, 9%, 14% and 15% on $1,428,000 
18% on $750,000 
20% on $42,100,000 
25% on $3,550,000 
30% on $900,000. 

The coterie of brokers who fix the "renewal" rate, insiders 
which appears to have such binding force upon the banks 
in New York City in the case of brokers' loans, does not 
limit its activities to loans but these brokers also execute 
orders for stocks and bonds on the floor of the Exchange. 
Inquiry of the Stock Exchange as to the number of 
brokers who are usually concerned in the fixing of the 
money rate, brought the reply that there were, as a 
rule, "4 to 8 or more," the Stock Exchange being usually 
represented by either the President or "one or more" of 
its governors, in the consultations where the rate is 
fixed. 

1-* xt i 1.111 WORKING 

Un November 10, a year ago, this brokers committee 
announced that the renewal rate on Call Loans would market 



306 THE STRANGLE HOLD 

be 12%. The following day, November 11, they raised 
it to 14%. On November 12 the rate was raised to 16% ; 
November 14 it dropped to 14% ; on November 21 it was 
made 8%, although other loans were made as low as 
6%. On December 18 it was 6%; December 23 it 
was raised to 10%; on the 29th to 12%; on the 
30th to 15% and remained at that rate until Janu- 
ary 5 when it was lowered to 10%. On January 31 
the renewal rate was 12%, the next day February 1 
it was advanced to 18%, dropped to 14% on February 
2; advanced to 17% on February 5 and remained at 
17% until February 9 when it was reduced to 14%. On 
February 17 it was 6%, raised again on February 26 to 
10% and continued at 10% until March 4 when it was 
reduced to 9%. On April 16 the renewal rate was 
again 10%. In May the highest renewal rate was 9%. 
In June the rate was 9% from the 25th to the 3 0th. 
July opened with a 10% renewal rate. It was lowered 
during the month but returned again to 9% on the 

a touch 16th, 17th and 27th. It is gratifying to note that since 
of public the publication of the Comptroller's statement of July 

control 31^ regarding excessive interest rates, the 'renewal" rate 
does not appear to have been advancd again as high as 
10%. 

It seems clear from the figures submitted that the 
amount of demand or call loans in the National and 
State Banks and Trust Companies in New York City, 
plus the loans placed by them for their correspondent 
banks, which are effected by the rate fixed by this Com- 
mittee of the Stock Exchange, probably EXCEEDS one 
thousand million dollars. As I pointed out in a previ- 



APPENDIX 307 

ous statement, on this basis an advance in the ".Renewal" 

rate from 6% to 18% for one day would add $360,000 

to the net profits of the lending banks for that day. In "profit- 

the first part of January of this year, for example, the EERING 

15% "renewal" rate exacted for six successive days 

meant, on this basis, a net interest profit of about $3,000,- 

000 or more for those six days. 

The raising or lowering of the "Renewal" rate on the 
Exchange is frequently accompanied by upward or 
downward movements in stocks and securities ; and those a crooked 
responsible for the fixing of the rate therefore have the game 
opportunity, whether exercised or not, of profiting largely 
by operations on the stock market, which is so often and 
directly effected by the call money situation. I do not, 
of course, undertake to say that this informal "money 
committee" does take improper advantage of their fore- 
knowledge ; but there are critics who severely censure the 
existing arrangements. Certainly all prudent and think- 
ing business men will agree that there is danger in the 
concentration of such opportunity and power in the 
hands of a few persons. Temptations to use this power 
for individual profit must arise, and human nature is not 
changed by high position in the financial world. 

Mr. Lincoln's axiom that God never made a man good Lincoln 
enough to be entrusted with unlimited power over an- SAID 
other man may be supplemented with the suggestion 
that no four, or six, or eight men are strong and pure 
enough to be entrusted with unlimited power over the 
finances of a great country without direct responsibility 
and accounting for their acts to the public or some 
other potent and intelligent authority. Power to fix 



308 THE STRANGLE HOLD 

money rates for all, or nearly all, of the banks in New 
auto- York City, and to change them daily, is a grip on the 
cratic heart of our commerce. It permits such interferences 
power as f a Uib} e human judgment, whim or interest may direct 
with the natural and orderly movements of money, the 
life blood of business. Many of us complain bitterly 
when we fear that the two houses of Congress, State 
Legislatures, or State or Federal administrators, acting 
in the open, and after debate and public hearings, have 
interfered with natural laws of trade. We condemn 
radicalism radical writers and speakers who advocate such inter- 
ferences and regard them as public enemies. Yet the 
matter of arbitrarily fixing money rates at the money 
center, possibly reversing the natural and healthy flow 
and effecting, directly or indirectly, billions of dollars 
of security values and other property, is left to a small 
and varying number of private citizens without official 
responsibility, deciding in a moment and in secret. 
dangerous The evils and dangers of such methods could be re- 
and cited indefinitely. They reach to the remotest corners of 
harmful j-n e Union and its possessions, and touch harmfully every 
practic c i ass f people. The direct tendency is to reverse one of 
the fundamental purposes of the Federal Reserve Act, 
which is to promote orderly distribution of money 
through the country to meet the needs of commerce and 
agriculture. 

Excessive interest rates offered in New York arti- 
ficially draw money away from outside communities 
and often leave legitimate enterprises starved or pinched, 
while feeding speculative movements which may be add- 
ing nothing to real industrial or commercial wealth. 



APPENDIX 309 

I reiterate the statement previously made that the ex- 
cessive rates on call money, arbitrarily fixed and toler- 
ated in New York, in my opinion, have been a potent in- 
fluence in depressing seriously the prices of all invest- 
ment bonds and standard shares, the shrinkage in which billions 
in the past twelve months has amounted, including the lost 
depreciation in Liberty Bonds to several billion dollars. 

It is no part of the function of a Government official 
to moralize on speculative operations. My attention is 
demanded when such operations produce conditions re- 
tarding the development of the country and endangering 
the stability of its business. Corporations, individuals 
and investors generally are drawn away from legitimate 
investments in new enterprises and in the shares and 
bonds of existing enterprises by the prospect of 10% 
to 20% interest. 

The effect of these rates is seen when the general everybody 
managers or executives of railroads or other large cor- HURT 
porations visit New York to raise money necessary for 
the redemption of retiring loans or for the extension 
and promotion of new business. The bankers and bond 
brokers solemnly point to the high rates paid for "call 
money" and corporations whose credit abundantly jus- 
tified a 5% or 6% interest basis, have been forced to 
pay 7% or 8% or 10% on loans for one year, three 
years or five to ten years; and are sometimes persuaded THE 
by the bankers through whom they obtain the funds GARR0TE 
that they are doing well to get money even on such 
terms, because money on call has been advanced often 
artificially to 12% or 15% or 20%, for a few days at 
a time. 



VICTIMS 



310 THE STRANGLE HOLD 

The sophistical argument that a high rate for call 
loans is a justification for a long time loan at 8%, 10% 
or 12% by a strong and solvent corporation is trans- 
parent, but many excellent corporations have, during the 
past 12 months, been forced to accept loans at exorbitant 
rates of interest for term of years which will inevitably, 
in some cases, prove a serious embarrassment and handi- 
cap in their future operations. 
all are The same cause that cripples and hampers a great 
railroad system or a municipal government also de- 
prives and injures or ruins a country storekeeper, a small 
farmer or the owner of a large or little manufacturing 
enterprise. 

The argument that these high money rates prevent 
panics by enticing call money from banks and others in 
the interior to New York will not bear analysis. The 
facts are that much of the money drawn from the in- 
terior and loaned on call in New York at fancy rates 
would, but for the temptation of the high rates and the 
fear which they instill as to the future of the security 
market, be used by investors and banks and corporations 
who have those idle funds in the purchase of standard 
railroad and other bonds; which would thus furnish 
funds to the New York market normally and naturally. 

The high rates for call money in New York have thus 
shut oif a large part of the investment demand for secur- 
ities, which, during the past 12 months, largely because 
of those disturbing conditions, have been forced down to 
the lowest prices reached in 40 years. 

It is my belief that if the call money rates in New 
York had been maintained at 6%, or at the maximum 



APPENDIX 311 

rates which are charged in other money centers, as I 
believe could have been done with a reasonable degree 
of co-operation upon the part of the New York banks, 
the unprecedented shrinkage in security prices in the 
past 12 months would not have taken place and the ap- 
parent loss of billions of dollars in values would have 
been avoided. 

My hope for the present is that, with the public in need of 
possession of the facts, sentiment will be strong enough Reform 
to bring about reforms. Money rates should not be 
raised or lowered or manipulated arbitrarily or in secret. 
New York bankers and financiers have tremendous re- 
sponsibilities to the general public, and all can be in- 
duced to realize and respect them, as some honestly and 
conscientiously do now. Bankers throughout the country 
should have impressed upon them that they owe direct 
and distinct duties to their customers and communities, 
in preference to earning excessive and questionable prof- 
its for stockholders and themselves, by pouring money 
into New York for interest exactions which inevitably 
most injure or destroy somebody. The best banking is 
the broadest and most foreseeing — that based on the 
conviction that the real, permanent, stable profit in busi- 
ness is in building up, encouraging and developing in 
their prospective spheres, not in starving the productive object of 
elements of communities in the hope of grabbing large reform 
profits from the speculative. 

Keports showing the extent to which, as referred to in 
my statement of July 31st, banks in New York City and 
elsewhere have, during the past year, been obtaining 
funds from the Federal Reserve Banks at rates varjang 



312 THE STRANGLE HOLD 

from four and one-half to six per cent and have loaned 
these funds in New York at the excessive rates referred 
to, running, in some instances, as high as 20%, 25% 
and 30%, are now being compiled. A statement con- 
cerning these transactions will be made later. 

October 22, 1920. 

Comptroller of the Currency said today: 

MILLION DOLLARS OF N. Y. LOANS CON- 
STANTLY AFFECTED BY RATES ARTI- 
FICIALLY FIXED 



Additional Examples of Loans on Which 20% and 25% 
Are Charged. Interest and Discount Collected by 
N. Y. National Banks, 6 Months Ending June 30, 
1920, Was About $100,000,000 Which, as Compared 
with Same Period in 1917 Is an Increase of about 
$50,000,000 in Interest Collected. 



SPEAK UP 



let the Criticisms on the statement given out by this office 
bankers £ or |.j ie newspapers of Monday last seem to me to be 
rather vague and feeble as well as anonymous. I hoped 
they would be strong, illuminating and constructive. I 
am constrained to believe that they do not express the 
thought of the bankers of the country or of New York, 
who certainly are men of ability, with intelligence and 
courage to speak clearly and frankly when they wish to 
speak. 

One of the functions of this office is to do all pos- 
sible to maintain and increase the goodwill and confi- 



APPENDIX 313 

dence of the public in the banks of the country. To 

PUBLIC 

that end continual labor, frequently troublesome to all C0NFI _ 
concerned, has been applied to make sure that the man- dence 
agement and conduct of all banks should be such as to needed 
deserve goodwill and confidence. Following along that 
same line, I think it right to reiterate some expressions 
included in the statement referred to, but unfortunately 
omitted by many newspapers which published portions 
of it. These are, that there is no purpose in this office 
to stir or cater to any prejudice against that great and 
useful part of our financial system popularly known as 
"Wall Street"; that there was and is no purpose to hold 
up the New York City bankers or any other bankers for 
special condemnation. It is my duty to discover and 
oppose what I believe to be evils and dangers threaten- 
ing or impeding the business of the country. There 
has been no attack on individuals or individual interests. 
The criticism from this office has been against a system 
and method. The first step toward correction of any 
wrong must be discovery and exposure. 

Statements of the existence of extortionate interest criticism 
rates in New York, affecting the operations of the whole JUSTIFIED 
country, made by me some weeks ago, were met by sneer- 

APPRE— 

ing denials through newspapers. Thereupon it became CIATED 
necessary to present confirmatory specifications and evi- 
dence. This has been done. Anonymous and indefinite 
denials are not contradictions. Statements of facts and 
figures, sworn to by the banks themselves, cannot be 
met by excited rhetoric or general denunciation, or un- 
sustained accusation of improper motive. 

In my previous statement I showed that the aggre- 



314 THE STRANGLE HOLD 

gate of these Demand or Call loans secured by bonds 
and stocks handled by the New York banking institu- 
tions for their own account and for account of their 
correspondents, upon which interest rates varying from 
7% to 30% have been charged, has probably averaged 
throughout the past year more than ONE BILLION 
DOLLARS. 
official The assertion by anonymous critics that the exorbi- 
reports tant interest rates were rare and applied to insignificant 
sums will not weigh against official reports made to this 
office under oath. We find, for example, one National 
bank declaring that loans made by it in the period cov- 
ered by my statement at rates in excess of 10% per 
annum, aggregated $448,000,000, including $186,000,000 
(1426 loans) at rates of 15% and over. On a certain 
day within this period another bank reported that, on 
loans for itself and correspondents, it was charging 
15% on $55,895,000, and 18%, 19% and 20% on 
$3,600,000 additional. The same bank admitted ex- 
robbery acting on another day 18% on $57,183,000, 20% on 
$1,400,000 and 25% on $14,055,000. On three days 
early in January the amount on which this bank was 
charging 18%, exceeded $63,500,000. 

Another New York national bank reported that it 
was charging on a certain day on loans made for its 
account, 16% on $23,500,000 while two days previously 
it was loaning at 14%, $27,100,000 and at 16% and 
18% $315,000 more; another day this bank reported 
that loans at 17% to 20% exceeded $17,000,000. On 
December 31 last the same bank made 11 new loans 
for over $2,000,000 at 25%, and on January 2 it made 



APPENDIX 315 

53 new loans aggregating $10,000,000 at 15% in addi- 
tion to some millions already out at 15%. 

Still another bank reports that, on a particular date insiders 
during the past year, it was charging on loans for its AND 
own account, 25% on $2,150,000, 13% on $300,000, outsiders 
15% on $10,900,000. On another date the same bank 
was charging 22% on $2,000,000 and 11% to 16% on 
$8,200,000 additional, with other loans at the same time 
bearing 7%, 8%, 9% and 10%. This particular bank 
has through this period been lending, as have other 
banks, many millions more at exorbitant rates for corre- 
spendent banks. The foregoing figures relate to only 
four of the thirty-four national banks in New York 
City and they are matters of record. 

It is of interest to the public that most of those New 
York banks, a few of whose loans are given above, while 
lending at these very indefensible rates, sometimes 25% some 
and 30%, were being accommodated at the same time at pR0FIT 
4>y 2 % to 6% by the Federal Reserve Bank of New' 
York with sums as great or greater than their loans 
recited above. They were, therefore, occasionally charg- 
ing borrowers 20% to 25% more interest than the rates 
they paid the Reserve Bank. 

The amount actually collected for interest and dis- 
count by the thirty-four national banks in New York 
City for the six months ending June 30, 1920, exceeded 
all previous records, and amounted to approximately 
One Hundred Million Dollars ($100,000,000), which 
was nearly Fifty Million Dollars ($50,000,000), or the 
nearly 100% in excess of similar receipts for the cor- "swag" 
responding period in 1917. 



316 THE STRANGLE HOLD 

In February last, the "Renewal" rate in New York 
City for the whole month averaged above 10%. This 
was more than double the normal average for call money. 

While nearly every national bank in New York City 
has admitted that its rates on the so-called "street" or 
"brokers" loans are marked up or down automatically 
from day to day according to the fluctuations of the call 
money rate, yet reports from some banks show a marked 
discrimination, and that they exact on some of the well 
secured loans rates considerably in excess of the so- 
called daily "Renewal" rate, while other banks adhere 
quite closely to that rate. 

As to the large amount of call loans held by national 
banks for account of correspondents (over $500,000,000) 
it may be of interest to state that the New York banks, 
division for their services in handling these loans, make varying 
of loot charges — sometimes a fractional commission is charged; 
sometimes, in view of the deposit balances carried, no 
charge is made; while at other times, the New York 
bank and its outside correspondents divide evenly the 
interest collected in excess of six per cent per annum. 

New York, as I have stated before, is the only city 
of any importance in the world where such interest rates 
as these exist or are tolerated. They have, in my opin- 
ion, been most costly to the entire country and can not 
be justified on any basis of economics or ethics- 
real The plainly, indisputably proper course is change of 
patriotism policy and reformation of abuses which have come al- 
most imperceptibly, not loose and wholesale criticism 
of the man trying to heave the lead line and give warn- 
ing of shoals. 



APPENDIX 317 

The point is not the qualities or intentions of the 
official, but whether the shoals are there. My work is 
to report them and prove where they are. My strong 
faith is that the bankers of the country will find and 
apply cure for the evil that has been shown. They have 
on them now some of the heaviest and most difficult 
responsibilities which ever rested on a financial body. 
The welfare not only of their own country, but of the for hu- 
world, depends in a great measure on their wisdom and manitys 
character. I believe they will meet the test. The most 
important part of the Comptroller's work is to help them, 
as he may. There is no better way to help than to 
detect and point out obstacles and perils in their path 
toward performance of the tremendous work they have 
to do. 



SAKE 






NOTE 

The foregoing statement of the Comptroller is worthy 
of careful consideration. It impresses the unbiased mind 
as a fair statement of fact and a dignified appeal for 
justice. Reading between the lines we find complete 
confirmation of all that has been said regarding the 
autocracy of our financial system. 

The last paragraph is an appeal to our financial auto- 
crats for justice and clemency. Such petitions were 
addressed, in times passed, to political rulers. Is it in 
keeping with American principles or ideals that we 
should ask the bankers to reform a practice from which 



318 THE STRANGLE HOLD 

we all suffer or is it the place of a free people to reform 
the laws so that such abuses cannot exist ? 

It is not the bankers' duty but the citizen's duty to 
correct these abuses and the banker must not be blamed 
so long as he is permitted to take advantage of our 
neglect. 

A great burden of responsibility rests on every citizen 
until our system of finance is reformed so that such 
abuses are made impossible. It is a duty which we owe 
to ourselves, to our country and to all humanity. 



INDEX 



Page 
ACCEPTANCES, how used.... 124 
ABUSES OF SYSTEM 

157, 166, 167, 171, 226 

"ALL THE TRAFFIC WILL 

Bear" 36 

See usury 

AMERICA, stands for 150, 295 

AMERICANIZE AMERICA.150, 158 
-AMERICAN BANKERS ASSO- 
CIATION 

Protest comptroller's state- 
ment 165 

AMERICAN PRINCIPLES 295 

Violated 148, 226, 228 

APPEAL 

Given taxpayer 110, 140 

Jury on 141 

APPENDIX 296-317 

APPRAISER, People are.. 104, 113 

APPRAISEMENT 104, 109, 112 

Land, etc 107, 123, 160 

Laws Required 140 

Perfected 113, 139, 143 

Personal property. 105, 112, 160 

ARBITRATION of assessment. 141 

ASSESSMENT 

Appeal from 111,140 

Arbitrary 107 

Arbitrated Ill, 141 

Certificate of 143 

For taxes 106, 141 

Guess work 107 

Used as appraisement 

106, 139, 143 

ASSESSOR 106, 139 

Appeal from 140 

Arbitrary power 109, 111 

Certificate 143 

AUTOCRATIC POWER 

.34, 35, 145, 157, 172, 230, 308 

Abuses of 166,173 

AUTOMOBILE 

As security 124 

Declared a luxury 157 

Selling plan 6, 124 

Reverse gear illustration. 60, 78 

AUTOMOBILE DEALERS 

Excluded from bank 5 

Injustice done 157 

Paper could be used 124 

Selling plan 6, 124 

Wrongs done by system. ... 7 
BANK 

Capital private property... 119 



Page 
BANK— Continued 

Clearing 25 

Deposits created by loan . . . 

24, 34, 117 

Laws to govern 

135, 136, 138, 144 

Lends credit, not money. 26, 34 
Loans 

General interest. . .3, 117, 148 

How made 23, 67, 160 

Refused 120, 124, 13S 

Renewed 131 

On land 160 

Personal property .. .159, 160 
Right, not privilege. 121, 160 

Mints our money 226, 229 

Not to be changed 118 

Operation of 22 

Origin of 20 

Public utility 

35, 39, 117, 121, 128, 147 

Reform 

Object of 

48, 117, 118, 136, 217 

Of national 144 

Of state 136 

Reserves (see Reserve) .... 27 
Rules for government of . . . 
135, 136, 138, 160 

BANK CREDIT 

Created, how 22, 24, 34, 67 

Crystallized into currency.. 226 
Federal Reserve notes are.. 222 

Limit 27, 73, 98 

Percentage of 21 

Safety 101 

Use of a right 117, 278 

BANK DEPOSITS 67 

BANK NOTES 

Origin 66 

Change suggested by Shaw. 185 

BANK OF ENGLAND 268 

BANK OF FRANCE 269 

BANK OF GERMANY 270 

BANKER 

Always conservative 232 

Appraises security 107 

Autocrat 157, 230, 306 

Broke law 80 

Caused panics 55 

Duty to finance farmer.... 206 
Efficiency compared to 

farmer 201 

Encourages gambling 195 

"Ethical" methods 171 

Feudal lord 152 



INDEX— Continued 



Page 
BANKER— Continued 

Follows Goldsmith's practice 

21,24,67 

Good faith tested 281 

Guilty of usury 166, 315 

In the stock market 192 

May refuse loan.. 120, 124, 136 

No desire to injure 

118, 282, 317 

Not blamed 147, 156, 280 

Our guardian 154 

Opposed Federal Reserve . . 232 

Power of 34, 35, 152, 224 

Protection for 283 

Responsible for stock prices 195 

Rules country 58, 80 

Trespasser 162 

Use greenbacks 237 

Uses nation's credit 222 

Wallingf ord 243 

BANKERS' STRIKE 44 

BANKING, "ethical" 170 

BANKING SYSTEM, based on 

deception 66 

BANKS DO NOT COMPETE.. 117 
BAR TO PROSPERITY. . . .1, 15, 98 
BILLS OF CREDIT, state not 

to issue 131 

BOARD OF EQUALIZATION. 109 

Appeal from 110, 140 

Law to govern appeal 140 

BROKERS fix rate on call 

money 194, 302 

BUSINESS 

Check on 79, 128, 220, 257 

Certainty secured 160 

Improved 100, 286 

No upset to 145 

Slump 16 

Worries gone 161, 28> 

"BUYERS' STRIKE" 

7, 43, 57, 100, 219 

Would be none 285 

Wrong term 44 

CALL MONEY 

Governs foreign exchange. 261 
Makes stocks fluctuate. 194, 307 

Rate on 164, 194, 301, 306 

CAPITAL OF BANK, private 

property 119 

CAUSE OF TROUBLE, fluctua- 
tion of dollar 12, 87, 257 

CERTIFICATE OF ASSESS- 
MENT 143 

CHAINS, invisible now 158 



Page 
CHINA, condition explained... 271 
CIVILIZATION 

Object of 156 

Result of 266, 273 

CLEARING, accomplished, how 25 
CLEARING HOUSE CERTIFI- 
CATES 69, 71 

Comedy of 71 

Not authorized 185 

CLEVELAND, administration of 9 

"CLOSED SHOP" 148 

COINAGE 

Government right... 80, 131, 134 
In private hands.. 128, 130, 226 
COMPETITION between banks 40 
COMPTROLLER OF THE 
CURRENCY 

Appendix 297 

Approves of, Fed. Res 215 

On interest 163 

Quoted 166, 297 

Report 70, 166, 216 

Stopped direct usury 173 

Table showing percentages 
of medium 21 

CONCLUSION 275-295 

CONFIDENCE 

First requisite 

86, 103, 242, 257, 282, 313 

Goldsmith retained, how... 66 

100% 99 

Maximum 101, 113, 122 

CONSTITUTIONAL PROVI- 
SIONS 80, 131, 144, 228 

Officials should uphold.... 134 

CONTRACTION 41, 43, 49, 113 

Explained 46, 91 

Reasons for 50, 54, 58, 258 

COST OF LIVING 8, 9, 10 

Not cause of turmoil . . .11, 286 
Affected, how 12 

CREDIT 

Amount of 245 

Denial to automobile dealer 157 

For Farmer 212 

Nation's, loaned to bankers 222 

Reason for use 64 

Reform needed 

65, 79, 101, 128, 159, 219 

Safety secured 101 

"CREDIT STRUCTURE," 

dangerous 165 

CURRENCY, elasticity sought. 

.217 225 
Fed'. ' Res! ' Note's ' not . '. V ..'226 



11 



INDEX— Continued 



Page 
DANGEROUS PRACTICES.... 308 
DECEPTION in banking.. 66, 71. 76 
Proposed by Secretary of 

Treasury 185 

DECLARATION OF INDE- 
PENDENCE 146, 295 

DEPOSITOR, bank does not 

lend money 26 

DEPOSITS 

Created by loan 24 

Remain deposits 25 

DISHONESTY overcome 125 

DOLLAR 

Cause of H. C. L 14, 286 

Compared to foot 14, 87 

Fluctuation of value 14, 46 

Stabilized 46, 87. 113 

EDGE ACT 5, 156 

Object 256, 265 

ELASTICITY 92, 217, 225 

EMERGENCY CURRENCY 

ACT 72, 185, 186 

ENGLISH EXCHANGE.... 248, 254 

Bank system 268 

Used tricks to escape gold . . 75 

EPITHETS not justified 146 

"ETHICAL" BANKING.... 170, 171 

EVOLUTION OF MEDIUM OF 

EXCHANGE 18, 31 

EXCHANGE, see Foreign Ex- 
change 

Primitive 18 

EXCHANGE SYSTEM 

Cause of trouble 16 

Evolution of 18 

Outgrown 32, 128, 280 

Perfected 84, 144 

EXPANSION, see Inflation 
EXPORTER like farmer. . .256. 285 

FARM LOAN ACT 

4, 200, 202, 205, 210 

Effect of 205 

Implication of 200 

Not a success 204 

FARMER 

Ability justifies credit 209 

Compared to Banker 201 

Indian 200 

Manufacturer 207 

Shipper 44 

Favors reform 198 

Efficiency of 201 

Illustration 41, 49 



Page 
FARMER— Continued 

Outlawed by system 

200, 210, 285 

Secures loan then 123 

Shipper 44 

Now 203 

Securities should be liquid. 210 

Time lock on bank 209, 211 

Robbed by banking system 287 
Ward of government 200 

FARM LOAN ASSOCIATION. 203 

FARMING compared to manu- 
facturing 208 

FAVORITISM 303, 305 

Overcome 116, 118, 124 

FEAR, banker's, rules country. 57 

FEDERAL RESERVE ACT.... 214 

Approved 214 

Changes sugegsted.135, 144, 231 
Increases banker's power . . 224 

Object of 46, 67, 72, 217, 225 

Opposed by bankers 232 

Prejudices overcome 221 

Proves coin motto 215 

Section 11-C 217 

Shows folly of gold standard 75 

Use of greenbacks 236 

Unlimited paper currency. 221 
Violates American prin- 
ciples 224, 226 

Violates constitution. . .133, 228 
FEDERAL RESERVE BANK 

NOTES 215 

FEDERAL RESERVE BOARD 

Effect of rules 160 

Given control by 144 

Rules to make 144 

Should control banks 135 

Suspend reserve require- 
ments 217 

FEDERAL RESERVE NOTES. 215 

Bank credit 225 

How issued 226 

Reserve against 217 

FEDERAL RESERVE SYSTEM 

214-231 

Aggravates defect 230 

Bankers' banks 223 

Not a cure 230 

Object of 217 

Reserve held 74, 217, 241 

FEUDAL SYSTEM 151 

FEUDALISM financial 152 

FICTION 

Loan is a deposit 24, 26 

Of gold standard 68, 75, 245 



111 



INDEX— Continued 



Page 

FINANCE COMMITTE 23 

"Money trust" 35 

FINANCIAL MASTERS 152 

FLAWS IN SYSTEM 

...4, 81, 95, 98, 148, 166, 173 

Basic 79, 257 

Stated 81, 148 

Shown by world conditions 16 

FLUCTUATION OF DOLLAR. 

12, 14, 87, 286 

Explained 88 

Stopped 47, 84, 113 

FOREIGN EXCHANGE 247-265 

Explained 255 

Gold reserve in 247 

Price hurts us 263 

Value of 248 

FOREIGN TRADE FINANC- 
ING CORPORATION.. 5, 256 

FREE COINAGE 

Of gold 228, 229 

Of credit 228, 230 

FREEZING POINT OF 

CREDIT 77, 94, 189 

FRENCH EXCHANGE 253 

Banking System 269 

"FROZEN CREDIT" 7, 63 

Cause 77, 94, 99, 189, 219 

GARROTE 309 

GERMAN EXCHANGE. . . .253, 264 
Banking system 270 

"GLARING DEFECT" 186 

GOLD, a commodity 176 

A standard of value 177 

Amount in dollar 58 

Fallacy of 178 

First used as money 19 

Foreign exchange 247, 258 

Free coinage 228 

Reasons for use 63 

Stopped silver talk 89 

Value of 58 

Worship of 68, 175 

GOLD REDEMPTION 

A joke 68, 75, 245, 259 

Deception practiced 20 

Juggled 71, 76, 217 

Trouble maker 180, 246, 257 

GOLD STANDARD 175 

Explained 176 

Origin of 20 

Causes contraction 

54, 58, 63 

Effect of 60, 63, 258 



Page 
GOLD STANDARD— Continued 

Shown to be fiction 

75, 176, 181, 219, 245 

Secretary Shaw on. . .181, 183, 184 

GOLDSMITHS 

Became bankers, how 66 

First bankers' 19 

GOVERNMENT 

Controlled by bankers. .. .56, 58 
Should coin money 133 

GRAFT, none possible 116 

GREENBACKS 236 

Held as reserve 74, 241 

Used by banker 237 

GUARDIAN 

Banker is 154 

No longer necessary 161 

"H. C. L." 8, 128, 219, 288 

Caused by 12 

Defined 9 

Not cause of turmoil. . . .11, 286 

HISTORY 

Of finance 180 

Should show 273 

Taught 131 

IDEAL 

Medium of exchange 86, £5 

Transportation medium. ... 85 

ILLUSTRATIONS 277, 278 

IMPROVED BUSINESS 

METHODS 159, 287 

INDUSTRIAL STRAIT- 
JACKET 46 

INDUSTRIAL TURMOIL. . .87, 149 

INFLATION 

Caused by war 13 

Effect of. 14, 46, 51, 92, 113, 252 

Explained 46, 87, 91 

Foreign exchange 253 

INHERENT RIGHTS 148 

INTEREST 163 

Call money... 164, 194, 301, 306 

"Ethical" extortion 170 

Usury 168, 170, 314 

INTRINSIC VALUE 190 

I. O. U. illustration 95, 97 

JUROR, qualifications 142 

JURY OF ARBITRATION.... 

Ill, 140, 141 

KIND OF MONEY not changed 159 
"LACK OF DEMAND"....... 44 



IV 



INDEX— Continued 



Page 
LAND 

Appraisement of. . .106, 107, 160 
Loan on, how secured. .123, 160 
National banks should make 
loan 135 

"LAWFUL MONEY"... 74, 241, 273 
LAWS BROKEN by banker. 80, 132 

LAWS REQUIRED 

110, 136, 140, 141, 144 

LIBERTY AND EQUALITY... 148 

Cannot exist 157 

LINCOLN quoted 307 

"LIQUIDATION" 7 

LIQUID SECURITY 210 

LIVING COST 

High 8 

Low 9 

LOAN 

A privilege 277 

Banker may refuse to make 

120, 124, 136 

Confidence in 112 

Is a deposit 24 

Made now 23 

Made then 123, 160 

Must be secured 119 

On land 159 

On manufactured articles.. 112 

On personal property 

104, 105, 112, 159 

Percentage of 115 

Question asked 154 

Refused to farmer 42 

Renewal of Ibl 

Right to 117, 121, 278 

Time limit on 210, 256 

LOAN COMMITTEE 23, 116 

LOCKE, philosopher 93 

LORDS, financial 152, 154 

MARGIN, stock bought on 191 

Loans made on 161 

MARKET VALUE 190 

MEDIUM OF EXCHANGE 

Bank credit 22 

Defined 84 

Evolution of 18, 31 

Metal 96, 272 

Object of 87, 95 

Perfection of 95 

Public utility 35, 128 

Table Showing percentages 21 

Three flaws in 81 

MERCANTILE AGENCIES.... 125 
METALLIC SYSTEM 96 



Page 
MEXICO 

Suffers from railroad break 

down 41 

Mint in private hands 129 

MINT 

In private hands. .129, 226, 229 
MONEY 

Amount needed 93 

Bank does not lend 26 

Basic flaw in 257 

Coinage of 80, 131, 183, 226 

Defined 84 

Fluctuation of volume. . . . 

14, 47, 88, 94, 113, 130 

I. O. U. system 95,97 

Like transportation 85 

No change in suggested... 159 

Not used 26 

Not value 

Object of use 87 

Paper unlimited 221 

Percentages of 21 

Public utility. ..31, 36, 85, 128 

Safety secured 101 

System of bookkeeping .... 95 
Who issues 226 

MONEY POWER destroyed 291 

Fed. Res. increases 224,226 

"MONEY TRUST" 149, 158 

Located 35, 154, 226 

Killed 289 

"MORAL HAZARD". .118, 125, 139 
Not allowed 119 

MOTTO ON COIN 214 

NATIONAL BANKS 

Lend on land 135, 160 

Loans on personal property 159 
Rules governing 135, 144 

NATIONAL CURRENCY AS- 
SOCIATION 69 

NATIONAL EFFICIENCY .266-274 

Case of England 268 

China 271 

Due to bank system 267 

France 269 

Germany 270 

Our own 

NATIONAL FARM LOAN AS- 
SOCIATION 202 

NEW KIND 

Of money not necessary... 159 
NEW YORK 166 

Should be world's clearing 
house 185 

Stock exchange 188 

NOTHING NEW 159 



INDEX— Continued 



Page 

NORMAL CONDITION 220 

How bettered 94 

"NORMALCY" 7, 93, 94, 220 

OBJECT OF MONETARY RE- 
FORM 48, 217. 220 

OHIO BANKERS ASSOCIA- 
TION 181 

100% CONFIDENCE... 99, 103, 242 

"OPEN SHOP" 149 

"OVER PRODUCTION" 44 

Blamed for slump 43, 287 

PACKERS 8 

PANICS ". .69, 200 

Cause 55, 71 

Occurred 54,200 

PAPER MONEY unlimited.... 221 
Issued 227 

PEOPLE appraise property. . . 105 

Deceived ". 68 

Do not rule 56 

Forced to accept clearing 
house certificates 71 

PERCENTAGE OF LOAN TO 

VALUE 104, 115, 160 

PERFECTION OF EXCHANGE 

SYSTEM 84, 95 

100% Confidence 99, 101 

PERSONAL INTEREST 

RULES ..108, 111, 113 

Overcome 120 

PERSONAL PROPERTY 

Appraisement 105, 112 

As security 159 

PETTY, SIR WILLIAM 98 

PLAYING THE STOCK 

MARKET 192 

"PLUTOCRATS" 146 

POPULAR PHRASES 7, 8, 93 

POWER OF MONEY destroyed 291 

PRICES, high 7 

Defined 12,88 

Edge Act 11 

Fall 10 

Fluctuation 12, 87, 126 

Low 9 

PRINCIPLES, AMERICAN.150, 295 

"PROFITEERS" 8, 307 

PROSPERITY, defined 3 

Checks, prosperity 

60, 78, 129, 219, 268 

Restored 149, 279 

Reverse gear on 60, 78, 257 



Page 
PUBLIC CONTROL 

100, 118, 120, 278, 306 

Right of 162 

PUBLIC OFFICIALS 

should act 134 

PUBLIC UTILITY 

Railroad and bank 

35, 39, 128, 147 

Service only should be con- 
trolled 38, 100, 157 

PUMP HANDLE 194,302 

PURCHASING POWER OF 

DOLLAR fixed 46 

Fluctuation 87 

PRIVATE CONTROL, of mint 129 
"PRIVILEGE," bank loan.. 121, 277 

PUJO COMMITTEE 233 

RADICALISM 294, 308 

RAILROAD 

Compared to bank 36,40,41 

Effect of breakdown in 
Mexico 41 

RATIOS 

Between business and 

money 91,93 

Exchangeable called price.. 12 
REFORM, attempted . . .150, 217, 225 

Farmer favors 198 

Laws required.136, 140, 141, 144 

Must not injure bank 118 

Necessity for shown 

16, 32, 40, 65, 81, 311 

Object of 48, 

100, 103, 117, 125, 136, 311 

Of credit 65 

REIGN OF TERROR 171 

REMEDY ...101, 118, 120, 125, 

136, 140, 141, 144, 231, 257 

Proposed by Shaw 185 

RENEWAL OF LOAN 161 

RESERVE, amount required.. 74 

Explained 27 

Folly of 239 

Limits bank credit 

28, 59, 73, 239 

May be suspended 74, 217 

Section 11-C 217 

RESERVE SYSTEM 

Faults of 73, 217 

Folly of 239, 248 

Object 46, 73 

Reserves credit 59, 77 

Used as check 120 



VI 



INDEX— Continued 



Page 
REVERSE GEAR ON 

PROSPERITY ...60, 78, 257 

RIGHT to bank loan 120 

RIGHT of public control 162 

ROBBERY ..166, 314 

RULES, for loan... 124 

Federal Reserve Board.135, 144 

State banks 136 

RURAL CREDITS 198 

Not necessary 209 

Time an element 212 

"SAFETY FIRST" 86,119 

100% secured 101, 121 

SAVINGS ACCOUNT 73 

SECRETARY OF TREASURY 

SHAW ....181, 192, 183, 186 
SECURITY 

Appeal regarding. .110, 140, 141 

Appraised 104, 107, 109, 112 

Automobiles as 6, 124 

Certificate of assessment . . . 143 

Farmers 105, 210 

Good but not bankable. . .2, 210 

Land 106 

Must be safe 124 

National banks 135 

Personal property. 104, 112, 159 
Percentage of loan fixed... 115 

SELLING PLANS 

Automobiles 6, 124, 157 

Banks, co-operated 6 

Could be used , 124 

Necessity for 6 

SERVICE 

Only controlled 38 

Of Assessor 143 

Of bank and railroad 38 

SHOEMAKER illustration..... 207 

SLUMP in business 157,219 

SPECULATION 188 

Game not straight 189,194 

The Game 192 

STABILIZE THE DOLLAR... 

46, 87, 118, 286 

STAR CHAMBER METHODS. 185 
STATE BANKING SYSTEM... 

116, 136, 140 

Rules for loans 136 

STATES denied coinage right. 131 
STOCK EXCHANGE 188 

Crooked game 307 

SYSTEM OUTGROWN. 79, 128, 280 



Page 
TABLE 

Comptroller's of medium of 

exchange 21 

Of value 85 

Percentage of loan 115, 136 

TARIFF 

Change caused panic, why. 56 

TAX appeal 140, 141 

Reformed Ill 

Dodging stopped 107 

Equalization 109 

Remedy 110 

TAX, assessment • • • • 106 

TAX PAYER, justice to. . . . 111 

Right of appeal... 110, 140, 141 

THIRTY WORDS 144 

TIME LIMIT on Loans 209 

Cause of 210, 256 

Stops exports 256 

TOBACCO as money 88 

TRANSPORTATION 

Compared to money 85 

Object of 85 

TRUE VALUE 107, 110, 111 

TRUSTS 287 

TURMOIL 

High Cost of Living and 

Low Cost of Living 10 

Shows wrong exists 7, 149 

Reason for 14, 46, 149, 310 

UNION LABOR 148 

UNSECURED LOANS 119 

Not allowed 139 

URBANITIS, care for 213 

USURY 166,298 

See Appendix 

Bankers guilty of.. 166, 167, 171 

Call money 301 

Division of loot 316 

Evils of 298. 317 

Practiced in Middle Ages . . 165 

Present method of 170, 171 

Profit from 315 

Terrible results 168 

VALUE 

Divided into units 90 

Is price 88 

Of dollar stabilized. . .46, 87. 95 

Of gold 58 

Of land fixed 107,123 

Of stocks, etc 190 

Personal property 104, 112 

Table of 85 



Vll 



INDEX— Continued 



Page 

VERDICT of jury 142 

"VESTED INTERESTS" 60 

VIOLATION OF CONSTITU- 
TION 133,228 

"VITAL DEFECT" 186, 187 

VOLUME 

Of business and money. . .91, 93 
Of medium affects life 130 

"WALL STREET" 298 

Crooked game 189 

Governs country 155, 233 

WALLINGFORD STORIES 

TAME 243 

WAR, caused inflation 18 

WAR FINANCING CORPORA- 
TION 4, 156 

Reinstated for farmer 4 



Page 

WEALTH has no power 291 

WHEAT PIT 188 

WILLIAMS, JOHN SKELTON. 163 

See Appendix 297 

Stopped direct usury 173, 306 

Quoted . . . 166, 167, 168, 215, 297 

WORDS necessary for reform. . 144 

WORLD CONDITIONS. . . . 16 

WRONGS 

All are victims 310 

Automobile trade 7 

Exporter 5 

Farmer 6 

Source not understood 7 

YARD STICK 

Compared to dollar 87 

ZERO POINT for credit... .77, 189 



Vlil 



